NZ Budget – Spending Boost | Argosy Property

21 May 2021

Global markets were higher overnight (S&P 500 index +1.1%) with the US market ending its three-day losing streak and reversing Wednesday's heavy moves.

There wasn't much fresh news, but markets switched back to a "risk-on" tone overnight with equities recovering, and US Treasury yields fell -4.5 basis points down to 1.63%, following a weaker than expected jobless claims report.

Most sectors were in the green  as tech sector doing most of the heavy lifting led by the tech giants Apple (+2.0%), Microsoft (+1.7%) and Mastercard (+1.9%) – which continued to be swayed by interest rate movements. The Energy sector was the only sector in the red as crude oil slipped -2.2%. Tesla, chip makers and other speculative parts of the market which took a big hit on Wednesday recovered with Bitcoin also bouncing from its low.
Major European markets (Stoxx 600 +1.3%) rose strongly as the tech sector led the charge, with Healthcare, utilities and financials also performing well.

Closer to home, the NZ Government released their 2021 budget with $15.1 billion in new spending over the next 4 years – which should be supportive for the economy.
Benefit rates will be lifted at a cost of ~$1bn a year while Health spending has been increased by $4.7bn over 4 years. Infrastructure investment has also been lifted along with funding for the $3.8bn housing acceleration fund. Treasury is forecasting the economy will have grown 2.9% in the year to the end of June, almost double its 1.5% forecast made in December while unemployment is expected to peak at 5.2% this June year before falling to 4.2% in the 2024 year.
We think the increased infrastructure spending, while necessary, will put pressure on an already constrained construction sector and affect inflation, while increasing benefit payments should support local consumption.

Argosy (ARG:NZX)

Argosy shares have been flat despite delivering a strong result for the 2021 financial year, as it deals with threats of increasing interest rates.

The highlight being net profit after doubling from last year to $241.7m, the main driver being strong revaluation gains of $157.7m (almost triple the previous year's revaluation gain) benefiting from a buoyant property market. Distributable income (which excludes revaluation gains) was $67.7m for the year up +13.6% on solid gross rental income increase and Argosy guided for 2022 dividend to be 6.55 cents per share implying a 4.4% dividend yield.

We are positive on Argosy as a commercial property exposure in a relative sense versus peers due to its diversified portfolio and current valuation being fair and inline with it's Net tangible asset per share of $1.53 (which is up +17.7% over the last 12 months).
However, with the backdrop of potentially higher interest rates we think it will be hard for ARG to outperform and we downgrade our rating to a HOLD. 

Australia & New Zealand Market Movers

The Australian market rallied strongly yesterday (ASX 200 index +1.3%) recovering most of Wednesday's losses, as the market becomes more sensitive to any news relating to potential rate hikes occurring sooner than anticipated.

The recovery was led by the beaten down tech sector and more particularly buy now pay later stocks after Macquarie estimated the global buy now pay later market to be worth $3.8 trillion, Afterpay climbed up +7.7%, followed by Altium +6.6% and Zip advancing 5%.

Banks also performed strongly, with the big 4 lenders all up strongly. Materials was the only sector in the red with mixed movements amongst major and minor miners. Qantas shares were up +3.5% after announcing it has begun turning a corner on its recovery enjoy strong domestic demand and expects to be cashflow positive for the second half of the 2021 financial year (ending june 30).

The New Zealand market rose strongly on Thursday (NZX 50 index +1.3%) as the market reacted positively to Labour government's big budget boost, as well as experiencing a broader market recovery from the recent sell-off.

Contact Energy held their investor day which focused on where demand growth will come from, focusing on thermal as a reliable source of renewable energy and lowering their reliance on Tiwar Smelter plant.

Travel companies got lift off, Air NZ climbing +3% and Auckland International Airport up +2.9% following the Qantas update. 

Stocks linked to the economy and higher consumer spending also got an uplift on the budget announcement – with Treasury expecting the economy will grow +3.2% in the next 12 months.


3 Things Markets will be Watching this Week

  1. Key events this week include the latest US Federal Reserve minutes, US housing starts and existing home sales, Inflation prints across Europe, PMI data across much of the globe and a dump of Chinese data on Monday including Industrial Production and Retail sales.
  2. This week 20 S&P 500 companies are due to report along with some of China’s largest companies and a few large international companies including Walmart, Home Depot, Lowe’s, Target, VF Corp, Ralph Lauren, Cisco, Applied Material, Tencent,, Baidu Inc, Vodafone and Porsche SE.
  3. Locally, the latest employment data in Australia is due along with earnings releases from Incitec Pivot, Trustpower, James Hardie, Kiwi Property, Webjet, Infratil, Serko, Ryman Helathcare, Aristocrat, My Food Bag and Oceania Healthcare.
Global markets were higher overnight (S&P 500 index +1.1%) with the US market ending its three-day losing streak and reversing Wednesday's heavy moves.

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