The key point to note about the last few months is that investors have become increasingly nervous.
The dominant catalyst causing the pull-back has been concerns around Sovereign debt issues, combined with slowing global growth and concerns over inflation. We hold the view that Central Bankers and Politicians will arrive at an orderly solution to the debt issue globally and we are unlikely to see a freeze-up of the credit markets.
The RBNZ expects the economy to grow by around 2.5% for the year to March 2012 and 4.6% for the year to March 2013. We believe that this will be a strong result but downside risks remain if global growth de-accelerates rapidly or if the Christchurch rebuild is significantly delayed.
Relatively low interest rates are supporting growth and following the decrease in the OCR after the Chrustchurch earthquake, OCR increases this year are highly possible after the recent strong GDP number. The strong rise in the NZD should mean that OCR increases can, however be softer and slower.
The 10 year average PE for the New Zealand market is about 15 times which indicates at face value that the current market rating versus the earnings outlook over the next two years is satisfactory. Moreover the gross dividend yield is about 7.6% p.a. for the current year which compares favourably with risk free deposit rates.
Importantly, company balance sheets are in reasonable condition with average gearing levels around 33% below the ten year average level of 37%. Interest cover is also improving from a low of 3.5x in 2009 to a projected 5x in 2012.
Overall the local sharemarket is not demanding in terms of valuation but the picture varies markedly at the individual company level. Around 40% of the market capitalisation is represented by Telecom, Contact, Auckland Airport and Fletcher Building. Both Contact and Auckland Airport are on PE’s of over 20x while Telecom and Fletcher Building are trading on below market multiples for 2012.
The point is however, that the most attractive value in the market lies in the medium and small capitalised companies and the “one-off” situations where there are specific situations creating value.
The corporate earnings season over August and September will impact upon the local market in terms of both the actual results and the outlook statements. Significant uncertainty surrounds current earnings forecasts and where companies disappoint we can expect prices to be marked down accordingly.
A significant amount of the activity in the New Zealand economy is driven by property transactions, consumer activity and government spending. There is increasing evidence that the RBNZ’s cut in interest rates following the latest Christchurch earthquake is improving housing market activity and retail spending. Continued high soft commodity prices and a warmer and wetter start to the Winter season has seen an improvement in farm spending and should filter through to the high street. The Rugby World Cup should also support NZ companies over the next 6 months, especially companies exposed to the Transport and Tourism sectors.
In summary, we consider that the local market is attractively priced and we expect positive returns for the market over the next six months and we can still find attractively priced companies with upside catalysts.
Mark Warminger