The New Zealand market has now digested the August results season, when a large proportion of NZX50 companies reported their financial results to 30 June 2018. In general results were solid, albeit costs were higher than analysts were expecting in some cases.
Equally important are the outlook statements, which are often the focus for the market. With most companies in the enviable position of operating in a good economic environment and with strong balance sheets, management teams were typically optimistic. However, we did note some caution appearing, particularly for those New Zealand focussed companies that are more cyclical in nature, for example Air New Zealand and Fletcher Building.
The analyst community appeared to mirror this increase in caution. The chart below shows the median earnings per share (EPS) growth forecast across the major New Zealand listed companies, and how these forecasts have changed over time. The forecast for the 2019 financial year has trended down since September 2017, and now sits at approximately 4%, below the EPS growth delivered in 2018.
Earnings per share growth forecasts for 2018, 2019 and 2020 since September 2016:
The New Zealand market however continued to climb in August, delivering a total return of 4.4%, the strongest August performance in 18 years. This is somewhat at odds with an index whose growth forecasts are trending down in an economy at the late stage of the cycle.
It is difficult to talk about markets without mentioning that this month is the 10-year anniversary of the collapse of Lehman Brothers; the catalyst that precipitated the start of the Global Financial Crisis (GFC).
While it has been a long slow grind out of recession for many major economies, and the high debt burden of some global central banks is an ongoing cause for concern, the global economy is in relatively good shape and GDP growth has been increasing for the past few years.
Interest rates should remain low for some time, particularly in New Zealand where the RBNZ expects to maintain the Official Cash Rate at the current rate of 1.75% into 2020. This means conditions will remain supportive to growth for some time.
But as this cyclical upswing matures, inflation and increasing wages should see interest rates rise to slow the rate of economic growth. This is already occurring in the US. While a slow down isn’t imminent, it is on the horizon.
Markets have been strong and company share prices are high relative to historic levels in many cases. With volatility having increased back to more normal levels in the last 12 months, and lots of good companies still delivering good earnings growth, this provides excellent opportunities for an active manager to deliver returns for investors. However, we have reflected our own note of caution in our positioning recently. Our goals to protect capital over time and deliver strong long-term investment returns for our clients are inextricably linked. That’s why at this point in the cycle we believe it is appropriate to turn the dial slightly towards capital preservation.