Monthly Investment News – February 2016

10 March 2016


Monthly Investment News
4 March 2016
Commodities Bounce Back – Volatility Continues
Global equity markets continued their difficult start to 2016 in February. Volatility remained elevated above
long term historical levels for the majority of the month. continue to believe that markets will eventually
settle and that the recent market selloff remains an opportunity for long term investors to buy high quality
stocks at discounted prices. That said, late in the month market sentiment appeared to improve dramatically
as commodity prices bounced sharply and the Australian and New Zealand earnings season generally
surprised to the upside. continue to hold the opinion that fear mongers are taking advantage of frail
investor sentiment. With a series of strong global and domestic economic data (AUS GDP, US unemployment
and manufacturing) it appears that our positive outlook is currently being supported by strength in
fundamental economic data.

Focus on the Fundamentals
excellent track record of organic growth in
combination with astute acquisitions.
Global equity markets continued to struggle in
February as rising risk aversion continued to Chart of the Month
dominate market sentiment for the first half of the
month. There was however some respite to the
vicious start to the year in the later part of the month
as commodity prices (mainly oil and iron ore) staged
a strong bounce from multi year lows. Overall
markets finished the monthly slightly lower,
although positive momentum appears to be gaining
traction.
Markets were weighed down by a global sell-off in
bank stocks, fear of a weakening economic backdrop
particularly from China, deflation fears, and worries
over Brexit’ fears over the upcoming British

referendum on E.U. membership.
The banking sector in AU/NZ continues to perform
We believe that there was a considerable amount of poorly and was the worst performing sector for the
overreaction on fear rather than any real month. remains significantly underweight
fundamental factors necessarily dictating the trend banking stocks and does not currently hold any of
in global markets. We believe we may now enter a the major 4 banks.
period of calm, as investors reflect on what has been Capital requirements and regulator issues continue
a difficult period to fathom. Volatility should to be major headwinds in our opinion. Until these
continue to retrace and as fundamentals as opposed issues are resolved we will remain contrarian to the
to fear drive market moves.
rest of the market.
Those investors that continued to focus on the larger Further focus has come on the state of the Australian
picture and invest in high quality solid stocks were housing market. An article published in the AFR
rewarded by a relatively strong earnings season in claimed that London based research firm Variant
Australia and New Zealand. had a number for Perception has labelled the Australian property the
standout results in the portfolio.
biggest housing bubble of all time. While we do not
EBOS is one example. The medical and healthcare prescribe to this view per se, we do believe that a
product provider delivered another excellent result housing market correction would be healthy and
set of financial results, with profits up 19%. EBOS needed as housing remains elevated in price to long
continues to surprise the market with its
term fundementals.

4 March 2016



Stock Market News
Financials worst performing sector for the month,
Market
Month % Change
Last 12 Mths
down 3.6%. remains underweight the financial
Equity Markets
sectors and will remain to do so while regulation and
capital constraints continue to create major
US (S&P 500)
-0.4%
-8.2%
headwinds for the sector. Further pressure is being
UK (FTSE 100)
0.2%
-12.2%
exerted on banks in relation to the state of the
Europe (STOXX 50)
-0.3%
-17.0%
domestic housing market. House price appeared to
Australia (ASX)
-2.5%
-17.0%
have peaked and continue to slide in February.
believe further price depression is likely, although a
NZ (NZX 50)
1.0%
9.0%
full blown slump is possible but also unlikely.
Global equity markets continued to be volatile over New Zealand Equity Market
February, although the start of March has seen The New Zealand Equity market continued to defy
markets become calmer and mover higher.
the odds, with the NZX 50 Index up 1.0% for the
Australian Equity Market
month of February. The sell-off in the NZ market has
been far less severe than experienced globally.
The Australian equity market (ASX 200) had another
challenging month in February falling 2.5%. The While valuations appear a bit stretched in the NZ
portfolio outperformed the index falling 1.5% for the market, we still see areas of value such as in sectors
month.
such as tourism and agriculture, which we believe
will experience earnings tailwinds over the medium
The materials sector was the out performer of the term.
month, up 10.7%. A strong bounce in the price of
iron ore and oil turned market sentiment on worst
perform sectors over the past 12 months. Industrials
also showed positive signs, up 7.9% as GDP figures
were much better than the market had anticipated,
with the economy growing by 0.6% in the last three
months of 2015 and 3% over the course of 2015.

Both unemployment and GDP have been stronger
that most market commentators having been
anticipating and we believe this will provide further
support to the sharemarket in the long run as equity

bears revise their long term forecasts.

Earnings season was the focus for NZ stocks over the
month, with a number of holdings in the
portfolios reporting strong profit results.
An example was NZ Refining, which released a full
year 2015 result worth celebrating, with the
company reporting 2015 net profit of $151m versus
only $10m in 2014. However, the share price
reaction was rather muted, as it seems the market
has now priced in higher expectations for the
company. While NZR shares are now priced for a
significantly better outcome than last year, upside
potential remains in our view.

4 March 2016




Stock in Focus – TREASURY WINE ESTATES
(TWE.AX )

Treasury Wines has released solid results for the first
half of 2016. These are largely in line with the recent
earnings update provided by management in
January 2016.

Sales were A$1.08 bn while profit was A$132million.
These are marginally better than market consensus
Notably growth was very strong from and Asia
(+127%) and America (+67%) and we believe this
trend will continue over the medium term.
believe the core investment thesis for TWE still
remains and continue to hold it in our portfolio. We
have now capture over 52% of share price
performance from TWE.

Commodity Corner

Dairy:
Iron Ore:
remains positive on the outlook of dairy and Iron ore prices surged 19 per cent in the month of
agriculture. Global dairy performed relatively February, the most since December 2012and have
poorly in 2015 and prices are still suffering from now established a foothold above $US50 a metric
over supply following the removal of trade ton. The rebound, which means that iron ore has
restrictions in Europe. However, the fall in the NZD outperformed all the members in the Bloomberg
is helping negate the fall in the price of dairy to Commodity Index in 2016, has probably been
some degree.
powered by restocking by Chinese mills and some
weather-related disruption to shipments from
In January, Fonterra New Zealand milk collection Australia. believe it may still be too premature
decreased 2% and Fonterra Australia milk collection to say whether iron is on a longer term upward price
decreased 5%.
increase, but we do believe that we may have seen
Prices are still struggling to cope with the extra the lows in price at the current juncture. Before any
supply added from the removal of European milk long term conclusions can be drawn, we would like
quota production in April last year. The EU has seen to see price consolidation before further upward
growth in milk production in each of the eight movement.
months following the removal of quotas on 1 April
Despite economic volatility, China is returning to
stronger monthly import growth, while solid
demand continues in Asia and Latin America.

4 March 2016

Fixed Income & Currencies

believes that the RBA will maintain interest Currency Markets
rates at the current level over the near term
. In our
opinion, there is however a distinct possibility that
Market
Level
Month % Change
Last Year
the cash rate moves higher in the latter half of 2016
Currencies
if employment and GDP figures continue to surprise
AUDUSD
0.7182
1.4%
-3.3%
to the upside and economic growth remains robust.
NZDUSD
0.6637
2.5%
-8.0%
It appears that the housing market may have
AUDNZD
1.0819
-1.1%
4.9%
reached its peak in 2015, with prices continuing to
ease in the first 2 months of the year. Although we
EURUSD
1.0870
0.4%
1.6%

don’t see collapse in house prices in the near term, In a reversal of recent fortunes, both the AUD and
we do expect to see the sector, as an investment NZD made gains last month as the US dollar
class, lag that of equities.
continues to come under pressure.
The RBNZ meets this week to discuss cash rate the US dollar has been under pressure this year,
decsion. As widely expected, the RBNZ left the cash although the world’s second biggest currency trader,
rate unchanged at 2.50% at its most recent Deutsche Bank, expects the US dollar to resume its
meeting, but highlighted that there were currently surge after slumping early this year, and we share
several major risks to the NZ econemy. Slowing this view. Over the medium term we remain very
China growth and falling oil & dairy prices were much of the view that both the AUD and NZD will
mentioned specifically.
move lower.
The RBNZ also mentioned that economic conditions This year has seen broad based depreciation in the
had become more accommodative with the NZD US dollar as market uncertainty has resulted in
continuing to fall. Tourism is also providing a boost reduced expectations of rate hikes by the US Federal
to the economy, and as the NZD continues its Reserve this year. Interest rates of a country are a
downward trajectory, its effects will resonate key determinant of currency strength, as it is
further through the economy. We believe interest essentially the return an investor can generate by
rates will remain low for some time.
holding cash in that currency.
Currently, there is more chance that the Official Cash We continue to believe the US economy is in better
Rate goes lower than higher over the medium term. shape than the pessimists believe, and as such we
This should translate into a weaker currency over still expect the US Fed to gradually raise interest
time and should also mean mortgage rates stay low rates later this year. At the same time we forecast
in New Zealand.
the Reserve Bank of Australia (RBA) and Reserve
believes that the US Federal Reserve (Fed) will Bank of New Zealand (RBNZ) to keep interest rates
continue to gradually raise interest rates over the at low levels (although given the data in Australia
course of 2016. Somewhere in the order of 0.25% there is a possibility of rates moving slightly higher).
per quarter would be would a seen as a comfortable In NZ several commentators are even calling for
rate hike path. believes that risk is that the Fed further interest rate cuts from the 2.50% level. As a
raise rates too quickly resulting in a down turn in result we believe there will be USD strength with
the US economy. Given the recent market volitilty AUD & NZD weakness over the course of the year,
and global gorwth concerns, the Fed may delay with the AUD and NZD settling at around the
their rate hikes to the latter past of 2016. US$0.70 and US$0.60 level respectively.
Ultimaltey, we see the current market turbluence
as temporary and as conditions normalise, the Fed
will revet back to rising its interest rates.

4 March 2016



Model Portfolio Performance
Australian Model Portfolio
New Zealand Model Portfolio
The Australian once again outperformed the The NZ Model Portfolio had another strong
general index (ASX200). Disappointingly, the month in February, up 2.4%, ahead of the market
portfolio was down -1.5%, however the ASX 200 NZX 50 index which gained 1.0%. Since inception,
down -2.5%. Since inception, the AU portfolio the NZ portfolio has now outperformed the
has now outperformed the general Australian general NZ market by 8.7% and is up 18.8% in
market by 11.3% and is up 4.8% in absolute terms.
absolute terms.
Given the market selloff, last month took the Earnings season dominated news flow across our
opportunity to add to its holdings. One stock we up portfolio holdings, with a number of companies
weighted in our holdings in Myer from 4% to 6% on reporting strong results.
the basis of a strong Christmas period combined Returns were led by Diligent Corporation which was
with easy monetary conditions that are now feeding up over 26% on a takeover from US private equity
back into the wider economy. The stock continued firm, Insight Venture Partners. If approved, Diligent
to perform well up a further 11.6% in February. shareholders will receive NZ$7.39 (US$4.90) in cash
Myer reports mid March and we expect to see the for each share held. This represents a 30% premium
strength of the consumer flow through to its bottom relative to last week’s closing price. Diligent Board
line.
Member is a technology based company in the
Healthscope and James Hardie both reported strong business of developing and selling a software
half year results despite the market being application called Diligent Boardbooks.
pessimistic on their outlook of late. Ultimately the originally added DIL to its portfolio on 1 September
company’s strong financial results override the 2015. Diligent has now returned 39% to investors.
negative market sentiment with both stocks rallying Air New Zealand shares retraced during the month,
in excess of 12% for the month. We continue to like however we remain very much positive on the
the investment thesis for both investments.
investment case. Air New Zealand’s profit increased
Banks were the major drag on this month’s a healthy 129.9% for the first half of 2016. This result
performance. Despite not holding any of the big 4 beat management’s previous guidance by over 10%
banks and being materially underweight the sector, which has largely been driven by improvements in
our Bank of Queensland and Macquarie bank fuel costs. Reduction in fuel costs along with
investments were not spared by the negative increased passenger capacity given its fleet
sentiment surroundings banks at the moment. Both expansion, means we believe AIR will beat
feel in excess of 10% on tough trading conditions. managements conservative NZ$800m full year profit
Despite the underperformance of bank stocks we guidance for 2016.
elected to remain underweight the sector.

4 March 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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and needs of any particular person. Individuals should therefore assess whether it is appropriate in light of individual circumstances, or discuss, with
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published on its websites. However, no warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions, recommendations
(which may change without notice) or other information contained in this document. research is based upon information known to us or which
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4 March 2016

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