Monthly Investment News
4 May 2016
NZX Flying High, ASX Playing Catch Up
April saw market sentiment continue to improve, particularly across sectors which were beaten up earlier in
the year such as Resources and Energy. The market reaction to any negative news has also become relatively
muted as volatility in markets has settled markedly. The New Zealand stock market reached a new record
high intra month while the Australian market is playing catch up. The recovery has not been limited to
equities, as oil and hard commodity prices have also bounced sharply
Commodities Recover
US Crude Oil Back to $44 a barrel
Global markets retraced slightly towards month end
and the US market has ended more or less flat for
the month of April. The Australian market
(measured by the ASX 200 Index) was up 3.3% for
the month, while the NZ market (measured by the
NZX50) also made another solid 1.0% gain in April.
One of the factors which drove a strong month for
the Australian market has been a rally across
commodities, which broadly experienced their best
monthly rally since December 2010.
The move higher in commodities has been driven by So the question remains, what to buy in the NZ?
a more positive outlook around the outlook for oil When investing in New Zealand we are much more
production, and improved sentiment around China, selective with our portfolio investments, and remain
a major commodity consumer.
focussed on NZ stocks with strong thematic trends
In fact, the outlook for oil seems to have improved as well as selected high dividend yield stocks. The NZ
markedly. Nations representing almost 60% of the market has historically offered a high dividend yield
world’s oil production gathered in Doha mid-month relative to other markets. For the market as a whole
to discuss freezing their output at January levels in we believe that return for the year ahead will
an effort to stabilize prices. Unfortunately, the predominantly be made up of dividend return while
meeting ended without any agreement on limiting the broader NZ market remains relatively flat. Higher
supplies. However, somewhat surprisingly oil dividend stocks should remain well supported across
actually continued to rally despite the seemingly bad both Australia and NZ as low interest rates mean
news. This is a very bullish sign for both markets and investors seeking income will continue to seek out
oil. The fact that bad news was unable to dent the attractive dividend paying stocks, and we hold a
current momentum suggest that there is underlying number of such stocks across our portfolios.
real demand. It appears investor sentiment has As commodities have rallied over the month, the
shifted somewhat to a more positive tone. Stark fortunes of the AUD & NZD have also improved.
contrast to the period of turmoil at the start of the There was a short lived comeback in USD strength
year. Oil has now bounced almost 40% from its against the AUD & NZD, as our interpretation of the
January lows.
Fed interest rate press release in April is that the
Accordingly, are of the opinion that oil may meeting was a step closer to another rate hike, and
have found its low point. There are several we believe a rate hike at the next meeting in June is
indications that the fundamentals for the very much on the table. We believe this will cause
commodity are continuing to improve.
USD strength through the year.
As mentioned above the NZ market is nearly at an The theme of selecting stocks which benefit from a
all-time high, and we generally continue to see more lower currency is one of our main ideas across our
“value” opportunities in the Australian market.
Australasian portfolios.
4 May 2016
Stock Market News
Pacific brands received a takeover from U.S-based
HanesBrands for a cash price of A$1.15%. This saw
shares in PBG jump 23% on the announcement.
Qantas Airways endured a bumpy month, falling
roughly 20% as the airline announced revenue-per-
available-seat kilometre (RASK), was down around –
5% and represents a significant deterioration from
the +2% outcome for the six months to December-
2015. The weakness appears to being driven by its
April saw market sentiment continue to improve, domestic business with a number of factors driving
particularly across sectors which were beaten up the softening in demand.
earlier in the year such as Resources and Energy. Steel producer Arrium was placed into voluntary
Market volatility in markets has also settled administration and shares were suspended from
markedly.
quotation after it failed to secure a funding deal to
Australian Equity Market
keep it afloat.
The ASX 200 rose 3.3% over April, outperforming New Zealand Equity Market
global markets (MSCI world +0.7%) as the Resource The New Zealand Equity market continues to defy
sector’s rally (+15%) continued for a third straight gravity, with the NZX 50 Index up another 1.0% for
month (the sector is now +42% off January lows).
the month of April.
Both oil and mining companies benefited from a Valuations now looks stretched in the NZ market,
material rally in hard commodities. Oil was up 19% and our outlook is for the market index to remain
for the month and iron ore up 23%. This saw mining relatively flat for the rest of the year. As such return
stocks up around 20% and energy stocks up around is likely to be made up more of dividend return
8%.
than capital appreciation for a number of NZ
The commodity price recovery was in large part stocks.
driven by stronger than expected Chinese GDP and In saying that, we still believe there are currently a
manufacturing
numbers.
Government
policy number of high quality investment options in the NZ
changes has seen the emergence of the ‘old style’ market, which make up our NZ model portfolio.
economy with credit growth and Chinese house Hence we remain close to fully invested in the NZ
prices continuing their upward trajectory.
portfolio.
The ASX benefited further from speculation that the In terms of recent additions to the portfolio, we
RBA would cut interest rates again in May to 1.75% have added Tourism Holdings (THL.AX) in April. As
after CPI numbers printed much weaker than the name suggests, THL fits some of our strongest
expected (-0.2% qoq). The repricing of the chance of portfolio thematic views in the NZ portfolio: 1)
a cut saw the AUD come under renewed pressure Tourism Boom and 2) NZ Dollar Weakness.
falling from 0.78 cents back below the 0.75 cent Tourism is set to be the biggest benefactor of a
mark. Overall, a lower AUD is beneficial to the wider weakening NZ dollar. THL rallied last week as it
economy. The tourism and agricultural sectors are upgraded its profit guidance significantly. The
likely to be the largest beneficiaries from the fall in announcement reflects management’s confidence
the currency assuming it can be maintained.
in recent market trends and momentum and we
The banking sector remained under pressure as view this very positively.
speculation concerning their upcoming results and
negative press surrounding the bank’s asset quality
and loan impairments kept investors wary.
4 May 2016
Stock in Focus – Fisher & Paykel Healthcare
(FPH.NZ / FPH.AX)
FPH has been experiencing a dream run, with FPH’s
share price up 40% over the past 12 months alone.
FPH has been one of the main beneficiaries of a
lower New Zealand dollar, as almost all of its
revenues are generated outside of New Zealand,
which has been reflected in FPH’s share price
performance. In more recent times FPH’s shares
have retraced slightly, likely reflecting the move
higher in the NZ dollar towards US$0.70. We
continue to forecast NZ dollar weakness and believe
the currency will settle closer to US$0.60, which will
provide a tailwind for FPH’s earnings in NZD terms.
Currency moves aside, FPH has experienced strong
operational improvements from new products Given this growth potential we forecast over the
which have been years in the making. At its recent next few years we remain buy rated on FPH despite
investor day FPH highlighted the elevated long term the impressive share price run.
growth potential for the business going forward, and Looking forward, we remain positive on the longer
we forecast double digit earnings growth for FPH term outlook for FPH’s and await the company’s full
over the next few years.
year result announcement due on the 27th of May.
Commodity Corner
Iron Ore:
Crude Oil:
Iron ore rallied strongly in April, up 22%. A major Oil has now bounced almost 40% from its January
contributing factor in the price recovery has been lows. We believe the outlook for oil seems to have
the additional stimulus from Chinese policy makers. improved markedly.
Nations representing almost 60% of the world’s oil
The government has signalled they will continue to production gathered in Doha mid-month to discuss
support economic growth, which is boosting freezing their output at January levels in an effort to
demand from Chinese steel mills. With steel prices stabilize prices. Unfortunately, the meeting ended
rising on improved economic growth, steel without any agreement on limiting supplies.
producers are more optimistic on the outlook, However, somewhat surprisingly oil actually
demanding more of the resource especially given continued to rally despite the seemingly bad news.
how low prices were at the time.
This is a very bullish sign for both markets and oil.
Iron ore still battles with an oversupply problem The fact that bad news was unable to dent the
from the mining giants stepping up production in current momentum suggest that there is underlying
order to flush out high cost producers. Further, mine real demand. It appears investor sentiment has
closures would be seen as a major positive for the shifted somewhat to a more positive tone. Stark
senior resource producers.
contrast to the period of turmoil at the start of the
year. Accordingly, are of the opinion that oil
We remain wary of further price increases from may have found its low point. There are several
here and err on the side of caution given the strong indications that the fundamentals for the
run up on price without a fundamental shift in commodity are continuing to improve.
supply reductions.
4 May 2016
Fixed Income & Currencies
The RBNZ left its benchmark interst rate on hold at Currency Markets
its April meeting at 2.25% following an unexpected
cut the month prior.
The bank sighted improvesments to investor
sentiment and a recovery in commoditiy prices as
two major factors for their change in direction from
their last meeting.
The NZD remains uncomfortably high in their
opinion and they remain conscience of its impact on
domestic inflation and NZ exports.
The AUD and NZD have rallied against the USD
believe inflation singals will be closely watched recent times as the USD has shown weakness across
by the market going forward given the weak the board.
Australian print and the subdued inflation outlook Interest rate expectations are a key driver of
globally.
currency strength, and in Australia the RBA has
With dairy prices remaining under pressure, the come out and surprisingly cut the cash rate, which
RBNZ may be more down beat at its next meeting in saw the AUD retrace.
June.
However, the NZD in has held on to its large gains of
Yesterday, saw the RBA slash interest rates a late, as the RBNZ effectively raised the hurdle for
further 0.25% to a record low cash rate of 1.75%. further rate custs significantly higher in April. While
The bank sighted a weakening dometic inflation Governor Wheeler did state that the “exchange rate
enviroment, with lack of global inflation remaining a remains higher than appropriate given New
major concern.
Zealand’s low commodity export prices”, the rest of
the statement caused siginificant NZD strength.
Whilst thought the move was slighlty
premature, the RBA does have a dual mandate to Our interpretation of the US Fed press release this
keep inlation between its target band of 1-3% and month is that the meeting was a step closer to
unemployment low.
another rate hike in our view, and we believe a rate
hike at the next meeting in June is very much on the
The CPI reading this month came in well below table.
expectations at -0.2% qoq which the bank used to
justify its actions.
We have been vocal in our views that that the US
economy is stronger than the pessimists would have
The budget was also released yesterday, with you believe, and we believe Fed Chair Janet Yellen
Treasurer Scott Morrison planning to cut company may be proven to be overly cautious in her approach
taxes, boost infrastructure spending and provide to interest rate hikes. Our forecast for higher US
income-tax relief, as he forecast an A$37.1 billion interest rates is the main driver for our view that the
($28.1 billion) deficit in the 12 months through June US dollar will strengthen and the AU dollar and NZ
2017. Net debt is predicted to climb to a record 18.9 dollar will retreat back towards US$0.70 and
percent of gross domestic product in the fiscal year US$0.60 respectively.
through June 2017, and rise again to 19.2 percent in
the ensuing 12 months.
4 May 2016
Model Portfolio Performance
Australian Model Portfolio
New Zealand Model Portfolio
The Australian managed a slight gain of 0.1% as The NZ Model Portfolio was down slightly in
the portfolio consolidates on a strong 3 months April as it fell -1.0%, behind the market NZX 50 index
(+3.3%).
Disappointingly,
the
portfolio which gained 1.0%. Since inception, the NZ
underperformed the general market as the ASX portfolio has now outperformed the general NZ
benefited from a large bounce in oil and iron ore market by 7.0% and is up 27.5% in absolute terms.
stocks. Since inception, the AU portfolio has Underperformance versus the broader market in
now outperformed the general Australian market April was driven predominantly by strength in the
by 6.0% and is up 6.9% in absolute terms.
NZD. A stronger kiwi put pressure on the likes of Air
During the month of April up-weighted its NZ, Fisher & Paykel Healthcare, and NZ Refining.
exposure to farming stock Elders to 7% from 5%. A While these stocks have all had a great run in recent
price decline gave us an opportunity to gain further times, we remain comfortable with the medium
exposure to a company we believe will benefit from term investment case given our view of sustained
the dinning boom thematic.
NZD weakness.
We also added a 5% weighting to Woodside Fletcher Building (FBU.NZ) was the strongest
petroleum. Both technical and fundamental factors performer, for the month, up 5.8%. FBU has rallied
now point to a bottoming in oil prices in our opinion. strongly in recent times and we remain positive on
Accordingly, felt it was opportunistic timing to its outlook pariculalrly given renewed optimism
take advantage of the bounce back in oil prices and aorund Australia.
gain exposure to the materials sector.
Tourism Holdings (THL.NZ) was added mid-month
Whilst we do remain underweight both the and has had a good start, up 4.6% since being added
commodities and the materials sector, we do to the portfolio. THL management have announced
believe that WPL is the safest and best way to play that, based on the current controllable initiatives,
an oil price recovery.
demand profile and fleet outlook, previous high level
guidance goal of $30m profit after tax has been
Almond producer Select Harvest bounced strongly brought forward to the 2018 financial year (from
over the course of the month, up 22%. SHV has had 2019). This announcement reflects management’s
a rough time of late as the global almond price came confidence in recent market trends and momentum
under significant pressure driven by supply issues. and we view this very positively.
We now feel that these are behind us and were
pleased with the management update during the Air New Zealand (AIR.NZ) was the main laggard in the
course of the month.
portfolio for the month, on the back of a higher NZD
ande oil price (given jet fuel is AIR’s key cost). We are
BHP was another strong performer, rallying 22% as watching developments closely.
iron ore prices staged a strong recovery from their
start of year lows.
4 May 2016
Stock ratings
Given the dynamic nature of share prices ’s rating can become out of sync with the projected total return as the share price moves. The rating
must only be viewed as valid with respect to projected total return at the time of rating or target price changes.
Individual stock ratings are determined by the projected total return on a stock. ’s analysts project a 6 to 12-month target share price for each
stock. The capital gain or loss implied by the 6 or 12-month target share price, along with the analyst’s projected prospective dividend yield,
generates the analyst’s projected total return for a given stock.
Based on a current 6 to 12- month view of total share-holder return (percentage change in share price from current price to projected target price
plus projected dividend yield), we recommend the following:
BUY: Based on a current 6 to 12-month view of total share-holder return, we recommend that investors buy the stock
SELL: Based on a current 6 to 12-month view of total share-holder return, we recommend that investors sell the stock
HOLD: We take a neutral view on the stock 6 to 12-months out and, based on this time horizon, do not recommend either a Buy or Sell
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4 May 2016