The New Zealand sharemarket posted another month of strong returns in October, buoyed by solid commentary at most annual meetings and continuing demand for dividend yields. The 3.2% rise in the NZX50 outpaced the 3.0% rise we saw from the Australian market and was certainly better than the -2.0% performance from the US market.
In the US, the corporate reporting season has played a part in this softness with the current quarter shaping up to be the weakest in three years. Most companies have posted better than expected profits, but the concern has come from the weakness in top line revenue, where 60% have disappointed the market. This suggests that corporates are growing earnings by cost-cutting, rather than due to strong demand for goods and services.
We have seen positive signs of late coming from the world’s second largest economy. Although Chinese economic growth for the September quarter was 7.4%, the slowest rate of growth since 2001 (apart from a 6.6% growth rate in the first quarter of 2009), most economists are picking this to be the trough, with the current quarter expected to be higher at 7.7%. Forward-looking indicators also point to a pickup in activity, with industrial production, retail sales and fixed asset investment all beating forecasts recently.
Locally, the annual meeting season has been in full swing providing plenty of corporate insights and trading updates for New Zealand and Australian companies. Generally, these have been solid and most companies are in good shape, despite the subdued outlook and persistent risks overseas. We have seen positive comments from the likes of Auckland Airport, Freightways, Port of Tauranga, Ebos and Contact Energy.
The new Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler recently gave his first public speech. The overriding impression was that it is very much “business as usual” at the RBNZ under new leadership. The speech reinforced our view that the RBNZ has no more than a slight bias to any further easing (such as an additional rate cut, as some market participants have been calling for) and that it will still take significant bad news for this to occur. A more likely scenario is that we will see the OCR remain at current levels for some time, at least until late in 2013 and possibly into 2014.
New Zealand and Australia continue to look like safer investment destinations than many other parts of the world. Both countries have low government debt, lower unemployment than most and have exports linked to the stronger Asian markets. However, New Zealand shares have risen strongly, making value difficult to find. With interest rates on hold for the foreseeable future, we think the market will remain well-supported, although gains from here may be more modest. Australia shares still lag most other markets substantially amid lingering economic concerns, making the market look better value. We expect more interest rate cuts in Australia, which should provide some market support. However, in Australia investors must take care regarding stock selection.
Simon Coulter is an Investment Adviser at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.