Investment Insight | Staying local - the case for New Zealand shares
In this Investment Insight we stay local and discuss clients’ New Zealand share market holdings. We also assess the outlook for New Zealand interest rates following the scrapping of the Reserve Bank’s all but certain interest rate hike that was to be announced on 18 August.
There are areas in the economy that will be affected by the current lockdown – hospitality and tourism especially. However, given the robust state of the New Zealand economy prior to lockdown, the supportive interest rate environment, and the ramp up in vaccinations, any significant sell-off should be short-term and a buying opportunity.
Below we discuss key positions in clients’ New Zealand portfolios
The good
Chorus is up over 13% since lockdown was announced earlier this week. It is tempting to think this is due to the uplift in data and fibre usage given we are all working from home. While positive for Chorus, that is a coincidence. This week the Commerce Commission announced the key part of the puzzle in how Chorus can charge its customers (Spark, Vodafone, 2Degrees, etc) for its fibre connections. This is a positive outcome signaling the continued focus of successive New Zealand Governments, and the regulator, to provide world-leading broadband to all New Zealanders. The regulatory settings are looking increasingly stable, making the prospect of strong dividends for investors more likely.
Infratil held its AGM on 19 August and said they see no material impact from the latest lockdown. Furthermore, we do not think a more extended lockdown will have a significant effect on the business. There will be some parts of their portfolio affected, such as Wellington Airport, but the largest assets in Infratil’s portfolio are defensive against any lockdown. This includes Vodafone, CDC Data Centres and electricity generator, Trustpower.
Fisher & Paykel Healthcare has benefited from COVID-19 due to its products’ contribution in alleviating COVID-19 symptoms. However, any widespread outbreak of COVID-19 cases in New Zealand will be negligible for Fisher & Paykel’s financial performance given New Zealand comprises such a small portion of the company’s sales. This compares to North America at 42% and Europe at 32%. The spread of the Delta variant globally is leading to an increased use of their respiratory care products as hospitalisation levels increase and Fisher & Paykel continues to support patient recovery globally.
Summerset shares the same risk as other retirement village operators if the current outbreak makes its way into one of their villages. Summerset is prepared for this situation, implementing a high level of precautionary methods since the beginning of the COVID-19 outbreak. In fact, they have already been in partial lockdown to prevent the spread of the RSV virus. From a sales and marketing perspective, Summerset will find it difficult marketing their properties for sale and settling on transactions although this impact should be minimal. The Reserve Bank of New Zealand keeping interest rates on hold is supportive if lockdown i protracted.
Spark has a resilient business model and a strong balance sheet. At its most recent earnings update last week the company announced its focus on more active infrastructure such as data centres while continuing its initiatives on the cost front offsetting legacy revenue losses. While not immune to the impact of lockdowns given the forced closure of its retail stores, Spark is a strong defensive company within the New Zealand portfolio.
The not so good
Air New Zealand has already taken a blow from the closure of the Trans-Tasman bubble. The longer New Zealand remains in lockdown, the worse it will be. Air New Zealand recently announced that its planned and necessary equity raise had been delayed to 2022 instead of September this year. However, if New Zealand moves to an extended lockdown, this may force the Air New Zealand board and its largest shareholder (the Government) to reconsider, if capital is required earlier. NZ Funds sold its Air New Zealand shares early on in the COVID-19 pandemic. We will reconsider owning the shares once we believe the price fairly represents our valuation of the airline.
Interest rates
As with life in general, the sudden lockdown has disrupted the widely expected interest rate rise by the Reserve Bank. On 16 August it was decided to continue to hold the Official Cash Rate (OCR) at 0.25% given the heightened uncertainty. However, the statement and the subsequent commentary clearly indicated that, as long as the COVID-19 outbreak is controlled, interest rate increases are merely delayed and we should expect the OCR to increase in October.
The Reserve Bank highlighted three factors behind this decision. The economy is viewed as being at/above full employment, inflation is expected to peak at over 4% and house price inflation is unsustainable. Their position was summed up in the following statement, “The Committee agreed that their least regrets policy stance is to further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment."
As we once again write our weekly Investment Insight in lockdown, and with the Delta variant spreading globally, there is reason to remain optimistic. Why? Vaccines. In New Zealand, over 2.6 million vaccine doses have been administered with over 1.6 million people given their first dose.
While the current vaccination rate is not enough, the ramp-up is positive and perhaps lockdown will reduce vaccine hesitancy. At the same time, the defensive nature of the New Zealand share market and the strength of the New Zealand economy prior to this latest lockdown makes us optimistic for the future.
There are areas in the economy that will be affected by the current lockdown – hospitality and tourism especially. However, given the robust state of the New Zealand economy prior to lockdown, the supportive interest rate environment, and the ramp up in vaccinations, any significant sell-off should be short-term and a buying opportunity.
Below we discuss key positions in clients’ New Zealand portfolios
The good
Chorus is up over 13% since lockdown was announced earlier this week. It is tempting to think this is due to the uplift in data and fibre usage given we are all working from home. While positive for Chorus, that is a coincidence. This week the Commerce Commission announced the key part of the puzzle in how Chorus can charge its customers (Spark, Vodafone, 2Degrees, etc) for its fibre connections. This is a positive outcome signaling the continued focus of successive New Zealand Governments, and the regulator, to provide world-leading broadband to all New Zealanders. The regulatory settings are looking increasingly stable, making the prospect of strong dividends for investors more likely.
Infratil held its AGM on 19 August and said they see no material impact from the latest lockdown. Furthermore, we do not think a more extended lockdown will have a significant effect on the business. There will be some parts of their portfolio affected, such as Wellington Airport, but the largest assets in Infratil’s portfolio are defensive against any lockdown. This includes Vodafone, CDC Data Centres and electricity generator, Trustpower.
Fisher & Paykel Healthcare has benefited from COVID-19 due to its products’ contribution in alleviating COVID-19 symptoms. However, any widespread outbreak of COVID-19 cases in New Zealand will be negligible for Fisher & Paykel’s financial performance given New Zealand comprises such a small portion of the company’s sales. This compares to North America at 42% and Europe at 32%. The spread of the Delta variant globally is leading to an increased use of their respiratory care products as hospitalisation levels increase and Fisher & Paykel continues to support patient recovery globally.
Summerset shares the same risk as other retirement village operators if the current outbreak makes its way into one of their villages. Summerset is prepared for this situation, implementing a high level of precautionary methods since the beginning of the COVID-19 outbreak. In fact, they have already been in partial lockdown to prevent the spread of the RSV virus. From a sales and marketing perspective, Summerset will find it difficult marketing their properties for sale and settling on transactions although this impact should be minimal. The Reserve Bank of New Zealand keeping interest rates on hold is supportive if lockdown i protracted.
Spark has a resilient business model and a strong balance sheet. At its most recent earnings update last week the company announced its focus on more active infrastructure such as data centres while continuing its initiatives on the cost front offsetting legacy revenue losses. While not immune to the impact of lockdowns given the forced closure of its retail stores, Spark is a strong defensive company within the New Zealand portfolio.
The not so good
Air New Zealand has already taken a blow from the closure of the Trans-Tasman bubble. The longer New Zealand remains in lockdown, the worse it will be. Air New Zealand recently announced that its planned and necessary equity raise had been delayed to 2022 instead of September this year. However, if New Zealand moves to an extended lockdown, this may force the Air New Zealand board and its largest shareholder (the Government) to reconsider, if capital is required earlier. NZ Funds sold its Air New Zealand shares early on in the COVID-19 pandemic. We will reconsider owning the shares once we believe the price fairly represents our valuation of the airline.
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| Share price | Performance and valuation | ||||
|
||||
| Price change | Price/Earnings | Gross Dividend | ||
| Company | 3 month | 12 month | Multiple | Yield |
|
||||
| Chorus | 11% | -7% | 64x | 4.9% |
| Infratil | 1% | 55% | 58x | 3.4% |
| F&P Healthcare | 2% | 2% | 53x | 1.6% |
| Summerset | 4% | 61% | 22x | 1.9% |
| Spark | 6% | 2% | 22x | 7.3% |
| Air NZ | 15% | 8% | n/a | 0.0% |
|
||||
| Source: Bloomberg. | ||||
Interest rates
As with life in general, the sudden lockdown has disrupted the widely expected interest rate rise by the Reserve Bank. On 16 August it was decided to continue to hold the Official Cash Rate (OCR) at 0.25% given the heightened uncertainty. However, the statement and the subsequent commentary clearly indicated that, as long as the COVID-19 outbreak is controlled, interest rate increases are merely delayed and we should expect the OCR to increase in October.
The Reserve Bank highlighted three factors behind this decision. The economy is viewed as being at/above full employment, inflation is expected to peak at over 4% and house price inflation is unsustainable. Their position was summed up in the following statement, “The Committee agreed that their least regrets policy stance is to further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment."
As we once again write our weekly Investment Insight in lockdown, and with the Delta variant spreading globally, there is reason to remain optimistic. Why? Vaccines. In New Zealand, over 2.6 million vaccine doses have been administered with over 1.6 million people given their first dose.
While the current vaccination rate is not enough, the ramp-up is positive and perhaps lockdown will reduce vaccine hesitancy. At the same time, the defensive nature of the New Zealand share market and the strength of the New Zealand economy prior to this latest lockdown makes us optimistic for the future.
Source: Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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