Monthly Investment News
3 January 2016
A Glimpse into 2016
Global equity markets ended the year with losses over December, while the Australian and New Zealand
equity markets managed to make gains. Given we have begun a new year, in this month’s newsletter we
highlight our outlook for 2016. As we head into 2016 we remain positively positioned towards equity
markets, although we believe investors will need to be selective in picking investments in order to generate
significant positive returns. Key themes we will be watching to drive markets in 2016 will be the pace of
tightening by the US Federal Reserve, the oil price, politics, and developments in China.
Watch to Watch in 2016:
The fall in Oil has been driven primarily by over-
supply, particularly as Organisation of Petroleum
Fed Tightening
Exporting Countries (OPEC) refuses to reduce output
Last month we highlighted the US Fed would likely and the US Shale gas boom continues to expand.
end an era of emergency support for the US The fall in the oil price has hit energy and resource
economy and lift interest rates for the first time in 9 companies hard, although over the medium term a
years. The market was somewhat un-phased by the lower oil price should encourage economic growth
initial interest rate lift-off, with US equities actually in our view. In saying that, further falls in the oil price
rising immediately following the announcement.
would likely weigh on investor confidence and a key
However execution will be key, as a path to higher development to watch in 2016 will be whether the
rates will still need to be gradual as to not overly Oil price can at least stabilise. Our view is that we will
impact on growth. We believe the scope and speed see some stabilisation, but a sharp recovery in oil
of rate hikes next year will be a key driver of markets remains unlikely in 2016.
for 2016. Given the rapid improvement in the US Politics
labour market, as well as expectations that inflation
will head gradually higher, we believe somewhere in Around the globe issues such as wage growth,
the order of 0.25% per quarter would be would a income equality, and the shrinking middle class have
seen as a comfortable rate hike path.
fuelled populist political movements based on hopes
and fears. In the US, Bernie Sanders, and who could
The Oil Price
forget Donald Trump have created heated policy
US Oil prices have fallen almost 70% since a June debates over such issues as immigration, national
2014 peak of $115 a barrel and are now close to an security, and fiscal policy. Fringe parties across
11 year low. Oil prices are driven by supply and Europe also continue to gain support from a larger
demand, and in recent times supply has far proportion of the mainstream population.
outweighed demand.
These political trends are likely to continue in 2016
Chart of the Month
creating uncertainty and we will be watching
developments for their implications on markets.
Chinese Growth
Last, but not least, we believe Chinese economic
strength will once again be a driver of markets in
2016. During 2015 concerns around Chinese growth
transformed into a significant slowdown in data,
before recovering somewhat in the back-end of
2015. Our view is that the Chinese economy is not
on the brink of collapse, and an expected growth
rate of around 6.5 – 7.0% for next year will be
supported by stimulus from the Chinese authorities.
3 January 2016
Stock Market News
Market
Month % Change
Year to Date %
Equity Markets
US (S&P 500)
-2.2%
-0.7%
UK (FTSE 100)
-2.0%
-5.5%
Europe (STOXX 50)
-5.7%
9.3%
Australia (ASX)
2.5%
NZ (NZX 50)
3.7%
13.8%
Global equity markets ended the year with losses
over December, while the Australian and New We believe the Australian equity market will
Zealand markets managed to make gains.
continue rise in 2016. We still believe that there are
key themes at play and therefore selecting the right
Australian Equity Market
sector and stocks can yield investors significant
The Australian equity market (ASX 200) made gains performance in our opinion. continues to have
to end the year, up 2.5% in December.
a heavy preference for agriculture, retail and
healthcare stocks, which we believe are set to
The energy sector was by far the worst performing benefit from core underlying themes.
sector down 7.5% for the month. The continued
decline in global oil prices was the major negative for New Zealand Equity Market
the sector. West Texas Intermediate fell almost 10% The New Zealand Equity market continued to break
for the month and currently sits around US$37 a record levels in December, with the NZX 50 Index up
barrel. remains underweight the sector with 3.7% for the month.
no direct energy exposure. We believe that prices
are likely to remain under pressure over the near While blue chip stocks trended higher, shares in A2
term given the current demand/supply imbalances. milk raised NZ index higher and were the talk of the
Any indication of OPEC cutting supply would be a market, up 57% in December alone.
large positive for the sector and cause us to review Following a weak first half of 2015, NZ GDP rose a
our outlook.
solid +0.9% for the 3rd quarter of the year, which is
Consumer focused sectors (consumer discretionary equivalent to +2.3% GDP growth per year (GDP or
+6.6% and consumer staple +7.1%) were the best Gross Domestic Product is one of the primary
performing sectors in the index. The bounce back in indicators used to gauge the health of a country’s
the retail sector is a key thematic for . The RBA economy).
interest rate cuts and a lower AUD are both The standout sector of the economy for the quarter
significant positives in our opinion. ’s AU was the services sector. Business services and retail
portfolio is heavily weighted to the sector with trade were strong while transport services were up
roughly 25% attributed to consumer related sectors 2.6% for the quarter alone, which is the largest gain
compared with the ASX 200 with 11% exposure.
in 5 years. Related to this front two of our key
We continue to be vocal supporters of the Myer exposures Air New Zealand and SkyCity had a strong
turnaround story and have captured over 35% of December, up 8.8% and 5.5% respectively.
returns from the stock. We continue to see this While valuations are certainly no longer cheap in
stock performing well into 2016 with strong the NZ market, we continue to see opportunities
tailwinds providing momentum.
and remain positive as we head into 2016.
3 January 2016
Commodity Corner
Commodities are likely to remain under pressure in
2016, although we believe further material falls in
prices are unlikely.
We saw substantial price corrections in commodities
in 2015 which reflected a number of factors,
however excess supply was a common theme in
most commodities markets. We believe overall
output from commodity producers is likely to fall in
2016 as inefficient producers exit the market. This is
will assist in addressing the excess supply issues and
overtime we believe prices will stabilise.
Oil:
Dairy:
Crude oil was one of the worst performing
remains positive on the outlook of dairy and commodities in 2015. It was down over 30% for the
agriculture. Global diary performed relatively year and prices have fallen almost 70% since a June
poorly in 2015 and prices are still suffering from 2014 peak of $115 a barrel to an 11 year low.
over supply from removal of trade restrictions in Additional supply entering the market (Iran’s oil
Europe.
production restrictions were removed) along with
However, we are starting to see signs of stabilisation the development of US shale gas market (seen as a
as the supply side responds to the lower prices by direct alternative for oil as an energy source) were
cutting total output. The ‘Dinning Boom’ thematic the major factors leading to the price decline. The
remains a key theme in our investment portfolios. Organisation of Petroleum Exporting Countries
Despite the price declines in 2015, we see this move (OPEC) which is dominated by Gulf counties elected
as a temporary response to additional supply. Core not to curb their production in the hope that high
underlying demand remains and we believe it is set cost producers exit the market. A significant oil glut
to grow rapidly in the medium term as demand from remains and will take some time to clear. Over time
Asia comes online.
we expect price will stabilise and the market to
return to a more positive direction.
El Nino is likely to impact farmers over the short
term. A particularly hot and dry spring/summer
period is materially impacting on NZ farmers.
Weather patterns are unpredictable and hence at
this stage it is difficult to assess the full impact and
consequences of the drought. However, we are
likely to see supply drop which could assist in the
recovery of dairy prices
3 January 2016
Fixed Income & Currencies
believes that the US Federal Reserve (Fed) will In our opinion, the RBNZ interest cut in December
continue to gradually raise interest rates over the was pre-emptive of a slowdown in the farming
course of 2016. Somewhere in the order of 0.25% sector. Although El Nino appears to be having a
per quarter would be would a seen as a comfortable detrimental effect to New Zealand’s major source of
rate hike path. believes that risk is that the Fed income, we believe it would have been more
raise rates too quickly resulting in a down turn in prudent to assess the summer period and its effects
the US economy. We believe that the Fed should before altering the cash rate. With the cash rate now
follow a slow and steady path to ensure growth in sitting at 2.50% we believe that it will remain at this
the economy is maintained. Any dip in key economic level for some time until a clearer picture of the
numbers (employment and inflation) will be closely entire economy is revealed. There are a number of
watched and should delay any further rate hikes. bright spots that remain for the economy. Tourism
Short US 10 year government bonds was a top and retail appear to be doing very well and will help
trade in 2015 and we believe the investment thesis to provide growth to the economy. Tourism is a key
holds for 2016. We initiated the trade on the 27th thematic in the NZ portfolio and we believe the
October 2015 at a rate of 2.02%. 10 year US sector is set to continue to benefit into 2016. A lower
government bond rates currently sit at 2.27% NZD will continue to assist the sectors performance
representing a gain of 24.25 basis points.
Currency Markets
believes that the RBA will maintain interest
rates at the current level over the near term. There
Market
Level
Month % Change
Year to Date
is however a distinct possibility that the cash rate
Currencies
moves higher in the latter half of 2016 if
AUDUSD
0.7303
1.5%
-9.7%
employment figures continue to surprise to the
upside and economic growth remains robust. The
NZDUSD
0.6847
4.8%
-11.0%
energy and materials sectors still remain the major
AUDNZD
1.0666
-3.1%
1.9%
drag on the economy. The decline in the mining
EURUSD
1.0860
2.5%
-9.5%
boom has had a significant impact on the economy
thus far. We still believe further adjustments to the
sector are needed, but we should start to experience It was another strong month for the NZ dollar and
a transition away from these sectors and towards Australian dollar against the US dollar, despite the
retail, agriculture and technology. It appears that fact that the US Fed hiked interest rates.
the housing market may have reached its peak in Moving through 2016 we believe the AUD and NZD
2015. Although we don’t see a material fall in house should reverberate this change in policy rates by
prices in the near term, we do expect to see the declining against the USD.
sector, as an investment class, lag that of equities.
Further cooling for housing demand should delay A change in the US policy rate means that the
any need for immediate rate hikes.
interest rate differential between AU/NZ and the US
is now relatively more attractive in favour of US
dollars. Consequently, people will demand more
USD increasing its value relative to the AUD and NZD.
We ultimately believe that as the US gradually hikes
interest rates and rates in AU and NZ remain low,
that the AUD could approach 0.70 and the NZD 0.60.
At the same time we see further downside potential
for the Euro, as the European Central Bank (ECB)
remains accommodative and will likely attempt to
stimulate the European economy further in 2016, in
our view.
3 January 2016
Model Portfolio Performance
Australian Model Portfolio
New Zealand Model Portfolio
The Australian portfolio had another solid The NZ Model Portfolio had another strong
performance for the month over December, up month, up 3.0%, albeit slightly behind the market
2.3%. This was marginally lower that the general NZX 50 index which gained 3.7%. Since inception,
Australian market (ASX 200) which was up 2.5% for the NZ portfolio has now outperformed the
the month. Since inception, the AU portfolio general NZ market by 7.0% and is up 18.8% in
has now outperformed the general Australian absolute terms.
market by 12% and is up 13.7% in absolute terms.
Returns for the month were led by Fonterra sharers,
There were a number of outstanding performances which rallied 9.1% in December. While this increase
for the month, with Treasury Wines (+9.6%), in share price of late has been impressive, putting
Wesfarmers (+9.2%), Myer (+8.1%), James Hardie the move in context the share price has now
(+7.5%) and Crown (+7.4%) all up over 7%.
recovered back to January 2015 levels. We had
argued Fonterra shares were oversold mid-year,
Crown benefited from speculation that James and they now appear to have recovered, reflecting
Packer may look to take the company’s assets our view.
private, while Myer and Wesfarmers felt the
benefit of a stronger retail sector.
Travel and Tourism strength is a key investment
theme of our New Zealand portfolio given our
The interest rate cuts from the RBA appear to be forecast for a weaker NZ dollar. This should translate
feeding back to the wider economy and supporting to higher revenues for domestic airports,
retail spend. Treasury wines continues to perform restaurants, entertainment facilities etc. Secondly, a
exceeding well and has now returned 43.7% to the lower domestic currency deters New Zealand’s
portfolios performance. The company is continuing traveling overseas, with a higher percentage electing
to benefit from the ‘Dining Boom” thematic along to holiday locally.
with a falling AUD.
On this front two of our key exposures Air New
Disappointingly, Ardent Leisure (-7%) was once Zealand and SkyCity had a strong December, up
again the major drag on the portfolios performance. 8.8% and 5.5% respectively.
It appears that Ardent is continuing to suffer from
lower than expected earnings reported in The main laggard for the month was Ebos (-5.2%).
November. The invest thesis for Ardent remains There was no material negative news-flow around
very much intact. We believe the stock will the company, and we believe the share price is
continue to benefit from the falling AUD and simply taking a breather given its strong run in recent
increasing tourism numbers over the coming months. We remain comfortable with the longer
quarters.
term Ebos investment case.
3 January 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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3 January 2016