The earnings season in general was better than expected and more importantly, future expectations have been held steady. The companies that have seen downgrades mostly are due to a stronger NZ dollar compared to management forecasts.
A number of themes emerged through the reporting season, which should be taken into account.
- Earnings in general were solid and forward looking comments were overall positive with a cautious tone. Global financial and political uncertainty could present a major risk going forward.
- Despite the above, the NZ economy continues to remain in a favorable position compared to the US and European economies, and continues to have strong exports to Asia. The Canterbury earthquake rebuild is a significant proportion of the forecast growth over the next 12 months, which is insulated to a large degree from off-shore events.
- Companies generally reported an improvement in domestic activity, with expectations for a continued improvement. A number of companies exposed to Australia reported a softening in earnings due to a weaker Australian economy and pressure from a strong Australian dollar.
- Many companies have been able to refinance at lower rates, resulting in a lower interest expense, reflecting an interest rate backdrop of lowered for longer rates.
Looking forward, there are a number of supportive elements. Commodity prices, although down from historical highs, continue to remain strong. NZ exports are increasingly sold into Asian and emerging market economies which continue to grow strongly. Monetary conditions globally remain relaxed and supportive, company balance sheets are in good shape and the Rugby World Cup should provide a short term growth injection.
Taking into account the above factors economic momentum should continue to accelerate in NZ over the next 12 months.
The local share market appears undervalued on a number of metrics. Dividend yields are above historic averages, the Price Earnings multiple is below the market’s long term average and on a NZ bond to earnings or dividend ratio, equities are relatively attractive. There still remains much uncertainty with respect to European Sovereign Debt issues, Chinese growth concerns and a possible renewed recession in the US but it appears equities are pricing in these issues.