Monthly Investment News
7 June 2016
Calm Before the Storm?
Global markets managed to grind higher over the month as the US stock market managed to rise for
the 3rd consecutive month. Equity markets are considerably calmer than during the turmoil which
shocked markets earlier this year, and investors who had bought at the start of the year will be now
sitting on healthy gains.
In terms of the local markets, the Australian market (measured by the ASX200 market index) gained 2.4%
for the month, while the NZ market (NZX 50 index) powered ahead 3.2% and is trading at an all-time
high. In fact, the rally in the ASX is the best month of May since 2005 in terms of market performance, given better shape than the pessimists would have you May has traditionally been a weak month based on believe, which is likely to result in the Fed acting on historical returns. The recent run in the Australian their gradual path to higher interest rates, earlier market has seen some market commentators warn than many in the market were expecting. of a pullback. We have been vocal in our views that
we saw value buying opportunities in the ASX earlier Fed expectations resukted in significant USD
this year, and continue to remain comfortable in our strength, and the AUD in particular has retraced
exposures across the Australian market. While sharply in May. At the same time it looks as though
relative value is certainly easier to find in Australia the Reserve Bank of Australia will also cut rates
than New Zealand at the current juncture, we also significantly given low inflationary pressures.
remain close to fully invested in our selected NZ One of our core portfolio investment themes is that
stock holdings. We remain focussed on NZ stocks the AUD and NZD will retrace versus the US Dollar
which fit our investment themes as well as focussing and we have several stocks in the tourism sector,
on high dividend stocks. exporters, and offshore earners across our portfoios.
One of the best performing sectors in recent times Yesterday saw the RBA keep interest rates
has been healthcare, across both Australia and New unchanged at 1.75%. However, they did not give any
Zealand. Healthcare stocks with perceived excess clear indication that they anticipate rates to fall
growth and safety continue to trade at or near further. This took the market by surprise somewhat
record valuations. Several healthcare stocks we are as it had expected a follow up cut in August. The next
positive on also have offshore earnings and are likely move for the RBA will be data dependant. If
to experience tailwinds as the AUD & NZD move inflation, employment, GDP growth or the housing
lower. From a big picture point of view our positive market show signs of weakness, we believe the
stance is based on population demographics, as the RBA won’t be shy in reacting.
baby boomer generation now heading into Tomorrow morning the RBNZ also decide on the
retirement, there is set to be a structural pick-up in path of their benchmark interest rates. The decision
demand for aged care goods & healthcare services, appears to be tight as a higher NZD and struggling
in our view.
dairy sector suggest rates should decline, while Aside from moves in equity markets, there were improvements in domestic data and the reluctance major moves in currency market, primarily as the US of the RBA to cut rates is likey to be in the forefront dollar stengthened during the month. We have been of Governor Wheeler’s mind. vocal in our view that the US economy is in much
Australian Model Portfolio
New Zealand Model Portfolio
The Australian Model Portfolio outperformed The NZ Model Portfolio was up 2.7% in May,
the general index (ASX200) considerably. The marginally behind the market NZX 50 index which
AU portfolio was up a stellar 8.1% over the course of gained 3.2%. Since inception, the NZ portfolio
the month and beat the performance of the general has now outperformed the general NZ market by
market by 5.9%. Since inception, the AU 6.0% and is up +30.4% in absolute terms.
portfolio has now outperformed the general Returns were led by Fisher & Paykel Healthcare
Australian market by 12.4% and is up 15.7% in (FPH.NZ). FPH’s share price continued to rally as the
absolute terms.
company has reported record net profit after tax of Select Harvest followed up last month’s strong NZ$143.4 million, an increase of 27% over the prior performance, with another 42% gain this month. As year. While FPH benefits from a stronger US dollar we had highlighted in the past, the market appeared (weaker NZD) given almost all of its revenues are to be overly bearish and complacent over the long generated offshore, its latest result highlights the term growth SHV offered. We now see the current success of its new product portfolio which has been share price more relective of SHV’s situation.
years in the making. The company has invested
significantly into product development in recent Another top performer was Macquire group, up years, and this is now flowing through into financial 22.7%. MGQ reported strong profit results at the benefits. Looking forward, we remain positive on the start of the month with cash earnings up 29%. Banks longer term outlook for FPH’s earnings growth and in general also benefitted from further remain buy rated on FPH despite the impressive improvements in market sentiment. MGQ is particly share price run. In saying that, we are trimming our leveraged to performance of global markets given its portfolio holding to 7.0% from 10.0%. funds management business.
NZ Refining was the detractor from performance for James Hardie was another stock with a strong the month. Given the extraordinary run for NZR in earnings update. JHX announced a profit of 2015, there was always likely to be some US$242.9m, up 10% from last years results. This saw consolidation in the share price as the tailwinds for the stock climb almost 14% over the month.
NZR – refining margins and a falling NZ dollar, reduced to more “sustainable” levels. Given the
The worst performing stock held in the portfolio was recent share price moves, we believe the market has
BHP. BHP suffered at the hands of a fading iron ore overreacted, and has provided a buying opportunity
price and a large law suit relating to the the Samarco for investors with a higher risk appetite. Our core
disaster. BHP was down -7.7% over the month.
view remains that the NZ dollar will move lower versus the US dollar. At current levels NZR offers a
Wesfarmers was removed from the portfolio and very attractive dividend yield of 9.4%. The key risk is
Sydney Airport’s weighting was downgraded from that the NZD does not fall or refining margins fall
7% to 5%.
sharply, in which case the dividend will be cut.