Monthly Investment News
1 February 2016
An Emotional Sell-off
Global equity markets endured the worst start to a year since 2009 as a rout across oil and commodity stocks
spread across the board, and investors reached panic mode. However, sentiment appears to have turned a
corner late in the month, sparked by moves from central banks across the globe. We have stated on several
occasions that we believe the market sell-off should be viewed as more of a buying opportunity, and remain
positive on the outlook for our equity portfolios for this year.
Oil, Cheaper than KFC
Looking ahead companies in Australia and NZ will start to report quarterly profits in February. During
The sell-off across equity market in January was not these “earnings season” periods investor focus
driven by new or surprising news-flow, although the usually shifts from economic issues back to company
magnitude of the sell-off surprised us. Plunging oil profitability.
and concern around China’s slowing growth saw measures of investor anxiety reach levels last seen in Chart of the Month
2013.
We have been positive throughout the sell-off and have viewed it as more of an opportunity to buy quality stocks at cheap prices. The worst time to sell is when everyone in the market is when everyone
else is selling. Market fear and investor panic was highlighted mid-month by a Royal Bank of Scotland
note telling investors to “sell everything”. We think this is absurd advice, classic fear mongering
especially without considering what investors hold and what their investments fair value is.
Towards the end of the month it appears as though
investor sentiment may have turned, following The oil price has fallen over 70% since 2014 and now
moves from central banks across the globe which sits at around US$30 a barrel. A number of factors
stemmed the sell-off across equity markets.
have contributed to the price decline, but ultimately an oversupply issue problem has been the major
The European Central Bank (ECB) indicated further catalyst of the selloff.
stimulatory measures will be announced at its March meeting, when we expect the ECB will Given the glut of financial information that is decrease interest rates further. Last week the Bank available, it is often easy to lose perspective of what of Japan (BoJ) surprised markets by introducing the numbers really mean. thought it may be negative interest rates, indicating the BoJ will go to useful to compare the price of a standard 55 gallon new lengths to support the Japanese economy.
(208 litres) barrel of oil verses a number of household expenditures to give some perspective of
Share markets took the annoucnements by the ECB how cheap oil really is. At current levels, a barrel of
and BoJ positively as a sign that central banks oil (AU$41.80) is fractional cheaper than a KFC Giant
globally will continue to introduce stimulus Feast Pack (AU$41.95), while the barrel the oil
measures to support growth and markets.
comes in is worth almost 2.5 times as much as the At the same time in the US, the Federal Reserve oil it stores remains on track to raise interest rates gradually. believe that oil prices may be nearing a bottom.
While the Fed indicated it is watching global growth Although excess inventory will mean prices take
developments, US economic data, in particular data some time to rebound, it difficult to see oil
around the labour market continues to be solid.
remaining depressed over the long run.
Stock Market News
We will look to reallocate our holding in MTU into
another investment in the near future.
We believe the Australian equity will turn around in 2016, ultimately ending the year higher. We believe
the current conditions are temporary and overtime they will revert to a more positive outlook. There are
a number of bright spots in the economy and we still believe that there are key themes at play and
therefore selecting the right sector and stocks can yield investors significant performance in our
Global equity markets endured the worst start to a opinion. continues to have a heavy preference
year since 2009 as a rout across oil and commodity for agriculture, retail and healthcare stocks, which
stocks spread across the board.
we believe are set to benefit from core underlying
Australian Equity Market
themes
The Australian equity market (ASX 200) had a horrid New Zealand Equity Market
start to 2016, down -5.5% in the month of January.
The New Zealand Equity market gave back gains in
The materials, energy and financials sectors (-10%, – January, with the NZX 50 Index down -2.4% for the
5.8% and -6.7% respectively) were the hardest hit month. In saying that, the sell-off in the NZ market
sectors by the difficult start to the year. The was far less severe than experienced globally.
continued decline in global oil prices and fear of a While the Reserve Bank of New Zealand has
global growth slowdown battered industries highlighted risks pertaining to lower dairy prices as a
leveraged to either scenario.
risk factor for the wider economy, a sector which has
remains underweight both the energy and made a come-back is tourism. The tourism sector
financial sectors, with no direct energy exposure. continues to reap the benefits of a lower NZ dollar,
Oil prices appear to be bottoming out in our opinion. with record tourism numbers released for
Recently Russia has indicated that it is ready to December (visitors arriving in New Zealand reached
address the oversupply issues with OPEC, which 444,900 in December, the highest ever monthly
could possibly lead to both parties cutting figure).
production. In this event, we would expect a strong Higher tourism (from international visitors and
rebound in oil prices and a strong recovery in the locals travelling within the country) should translate
sector. However, it is difficult to assess the likelihood to higher revenues for domestic airports,
at this stage and therefore we remain on the side- restaurants, entertainment facilities, education
lines before adding possible energy exposures.
providers and retailers in particular, while also giving
Telecommunications and utilities were the best local business an uplift in customer spending. Our NZ
performing sectors on the ASX (up 2.0% and 1.6% Model portfolio has several holdings set to benefit
respectively). These are considered rather defensive from tourism, such as Auckland Airport, and Air New
sectors and therefore tend to outperform the Zealand. A tourism boom continues to be one of our
general market in periods of decline. M2 Group key multi-year investment themes.
(MTU.AX) is a key telecommunications holding in the
AU portfolio and was a strong performer in the
month of January, up 10%. Last year, MTU received
a merger bid from rival Vocus Communications and
shareholders have now approved the go ahead.
Stock in Focus – SkyCity (SKC.NZ / SKC.AX)
We believe a lower NZD and AUD will continue to
benefit a multitude of companies in Australia and
New Zealand, and our portfolios are positioned
accordingly. SkyCity is one of these businesses. With
the downtrend of the Australasian currencies
continuing in 2016, tourism is seeing a large uplift in
numbers in our view (particularly from China).
SkyCity Entertainment (SKC) has continued its strong
earnings momentum in the first half of 2016 and this
has been reflected in the share price of late. SKC has
reported profits that are significantly up compared
to previous periods due to a combination of factors.
Profit is expected to beat last year’s same period
results by between 26-30%.
Commodity Corner
Dairy:
remains positive on the outlook of dairy and The ‘Dining Boom’ thematic remains a key theme in
agriculture. Global dairy performed relatively our investment portfolios. Despite the price declines
poorly in 2015 and prices are still suffering from in 2015, we see this move as a temporary response
over supply following the removal of trade to additional supply. Core underlying demand
restrictions in Europe. However, the fall in the NZD remains and we believe it is set to grow rapidly in the
is helping negate the fall in the price of dairy to medium term as demand from Asia comes online.
some degree.
El Nino is likely to continue to impact on farmers
Fonterra Co-operative Group reduced its forecast over the short term. A particularly hot and dry
Farmgate Milk Price (price paid to farmers) for the spring/summer period is detrimentally impacting on
2015/16 season from $4.60 per kg of milk solids to NZ farmers. Weather patterns are unpredictable and
$4.15 per kg of milk solids. The decrease has been hence at this stage it is difficult to assess the full
driven by lower commodity prices, with dairy impact and consequences of the drought. However,
continuing to struggle with over supply factors.
we are likely to see supply drop which could assist in the recovery of dairy prices.
On a positive note, we are starting to see signs of stabilisation as the supply side responds to the lower
prices by cutting total output. New Zealand farmers have already began cutting back on the production
of diary.
Fixed Income & Currencies
believes that the US Federal Reserve (Fed) will continuing to fall and market interest rates (i.e.
continue to gradually raise interest rates over the mortgage rates) declining.
course of 2016. Somewhere in the order of 0.25% per quarter would be would a seen as a comfortable
rate hike path. believes that risk is that the Fed raise rates too quickly resulting in a down turn in
the US economy. Given the recent market volitilty and global gorwth concerns, the Fed may delay
their rate hikes to the latter past of 2016.
Ultimaltey, we see the current market turbluence as temporary and as conditions normalise, the Fed
will revet back to rising its interest rates.
believes that the RBA will maintain interest
rates at the current level over the near term. In our Tourism is also providing a boost to the economy,
opinion, there is however a distinct possibility that and as the NZD falls its effects will resonate further
the cash rate moves higher in the latter half of 2016 through the economy. We believe interest rates will
if employment figures continue to surprise to the remain low for some time.
upside and economic growth remains robust. The
energy and materials sectors still remain the major Further there is more chance that the Official Cash
drag on the economy. The decline in the mining Rate goes lower than higher over the medium term.
boom has had a significant impact on the economy This should translate into a weaker currency over
thus far. We still believe further adjustments to the time and should also mean mortgage rates stay low
sector are needed, but we should start to experience in New Zealand.
a transition away from these sectors and towards Currency Markets
retail, agriculture and technology. It appears that the
housing market may have reached its peak in 2015.
Although we don’t see a material fall in house prices
in the near term, we do expect to see the sector, as
an investment class, lag that of equities. Further
cooling for housing demand should delay any need
for immediate rate hikes.
As widely expected, the RBNZ left the cash rate
unchanged at 2.50% at its most recent meeting. The Both the AUD and NZD came under pressure this
Reserve Bank highlighted risks pertaining to global month, amidst the global market sell-off and
growth and lower commodity prices as key risk concerns around China. Both currencies have been
factors for the wider economy.
hit by commodity weakness, with the AUD being
Slowing China growth and falling oil & dairy prices more affected by the fall in the oil price.
were mentioned specifically, as these have been key The cautious statements by the RBNZ also weighed
factors driving financial markets of late. Although, on the NZD at the end of the month.
they highlighted a number of bright spots to the
economic outlook. Net migration continues to Moving through 2016 we believe the AUD and NZD
increase, which should translate into higher will continue to weaken against the USD, as the US
domestic growth and productivity.
Federal Reserve gradually raises interest rates over
the course of the year.
The RBNZ also mentioned that economic conditions
had become more accommodative with the NZD
Model Portfolio Performance
Australian Model Portfolio
New Zealand Model Portfolio
The Australian portfolio tracked closely to the The NZ Model Portfolio gave back gains in
market index in January. The portfolio was down – January, down -1.9%, slightly ahead of the market
5.5% with the ASX 200 down -5.48%. Since NZX 50 index which lost -2.4%. Since inception, the
inception, the AU portfolio has now NZ portfolio has now outperformed the
outperformed the general Australian market by general NZ market by 7.4% and is up 16.5% in
11.3% and is up 7.4% in absolute terms.
absolute terms.
Despite the poor start to the year, there were a Returns for the month were led by SkyCity (SKC.NZ)
number bright spots in the portfolio. M2 group which gained 5.4%. SKC announced profit is
benefited from its defensive nature and the expected to beat last year’s same period results by
shareholder approval of the merger with Vocus between 26-30%. Strong trading results are being
Communications, up 10%. Treasury Wines had driven by favourable domestic economic conditions.
another vintage performance, beating its expected The VIP gaming segment of the business had an
profits by up to 25% and adding 9.2% for the month. exceptionally strong performance partly driven by
Treasury Wines has now returned us 57% since dejected Macau gamblers are finding new gambling
adding it to the portfolio in September 2015. We venues. We continue to believe in the SKC growth
continue to hold Treasury Wines as it benefits from story which should continue to benefit from
the ‘Dining Boom” thematic along with a falling AUD, improving NZ tourism and favourable domestic
but are monitoring price valuations given the factors.
current consensus P/E of 31x.
Air New Zealand (AIR.NZ) also outperformed, ending
Given the market selloff, took the opportunity the month approximately flat. Recent AIR operating
to add to its holdings. We up weighted our holdings stats continue to be encouraging, as AIIR carried
in Myer from 4% to 6% on the basis of a strong 1,514,000 passengers during the month of
Christmas period combined with easy monetary December, 5.8% more than the same period last
conditions that are now feeding back into the wider year.
economy. We also added a 5% weighting to Select Technology company Xero (XRO) was the worst
Harvest (SHV.AX) and Costa Group (CGC.AX). Both performer for the month, down -15.2%. There was
are Australian agriculture producers. Select Harvest no specific news-flow driving the sell-off, and XRO
grows and processes Almonds and the largest listed seemed to be punished more severely in a falling
almond company in the world. CGC is Australia’s market given its high risk nature. The fall also needs
leading producer of fresh fruit and vegetables, to be put in context, with the stock still up almost
supplying the major supermarkets with their fresh 18% since September last year. We remain positive
produce.
on the XRO investment case.