It has been an interesting time for the New Zealand stock market. Reviewing the performance year to date, despite the NZX 50 index increasing by 5%, the performance is largely driven by a strong January and February. Outside of these two months the market has been flat.



NZX 50 monthly return

US 10 Year Treasury annual yield

Jan -2015



Feb – 2015



Mar- 2015



Apr – 2015



May – 2015



June -2015 (month to date)



Source: IRESS, 15 June 2015


Two factors have been driving the performance of the market.

The first is global interest rates. We have seen interests rates lift markedly from very low levels. The US Treasury bond yields – a key benchmark – have risen strongly since April. The US 10 year bond yield is up from 1.9% in April to currently be trading at 2.4% and other major interest rate benchmarks have increased similarly from low levels. Last year the NZX50 had a very strong year, up 17.5%, and a large part of this was due to falling international rates and the increasing attractiveness of the dividend on our market, as investors searched for a better return or yield on their investments.  The reversal in this has seen global interest rate movements make our stocks relatively less attractive to offshore investors.

The second factor is the lack of earnings growth, particularly from larger companies on the market. There are some companies who have demonstrated earnings growth, Fisher & Paykel Healthcare and Air New Zealand being two examples, but on the whole it is fairly muted.

The 0.25% cut to the OCR announced on Thursday last week was aimed at lowering the NZ dollar but this does also help offset the impact of rising global interest rates. The market reacted positively to the OCR cut on the day and there is potential of another 0.25% cut to come later this year. However the cut does represent how the Reserve Bank of New Zealand (RBNZ) views increased risk to the NZ economy as a result of lower dairy prices and recent rises in petrol prices.

Looking at the individual stocks, the electricity companies and other large yield stocks, which represent a large part of our local market, have fallen recently driven by the rising interest rates.

Z Energy has been a standout. The market reacted very positively to the announcement from the company that is to acquire Chevron NZ (or the Caltex petrol stations) but this is still subject to regulatory approval expected in November.

Contact Energy has also been the other significant mover. After initially frustrating investors with an offshore geothermal strategy, it reversed its intentions and instead paid out excess cash on its balance sheet instead of proceeding to invest this cash offshore.  The rationale is interesting because it could signal that majority shareholder Origin Energy, who owns just over 50%, may be reviewing its holding in the company particularly after its own balance sheet is coming under pressure from the lower oil price. Contact’s share price has been volatile as the market has speculated as to what may happen.

Looking forward, without the support of falling interest rates the NZ market will require earnings growth from the companies to be able to continue to provide attractive returns to investors. On a multiple of price to earnings the NZ market certainly does not look cheap. The companies within the NZX50 index are trading on an average multiple of 19x earnings; this is well above its average of 15x earnings over the last five years.


Sam Trethewey

Senior Analyst

Disclosure of interests: Milford holds positions in all of the companies listed above on behalf of clients.

Disclaimer: This blog is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.