Market Commentary
The New Zealand equity market delivered another soft month of returns in April. Whilst stock specific news was thin on the ground, continued troubles in Ukraine, very strong consumer price inflation and the resulting move higher in long term interest rates were all headwinds. The New Zealand economy remains robust, and we expect companies are currently earning good profits. However, the equity market is forward looking, and weak consumer surveys on the back of cost of living increases and higher mortgage rates has seen the market price in a weaker outlook over the next 12 months.
Some travel and leisure…
Market Commentary
The New Zealand equity market delivered another soft month of returns in April. Whilst stock specific news was thin on the ground, continued troubles in Ukraine, very strong consumer price inflation and the resulting move higher in long term interest rates were all headwinds. The New Zealand economy remains robust, and we expect companies are currently earning good profits. However, the equity market is forward looking, and weak consumer surveys on the back of cost of living increases and higher mortgage rates has seen the market price in a weaker outlook over the next 12 months.
Some travel and leisure restrictions were eased over April which will see a further shift from spending on goods to spending on services, like travel and dining out. We find both of the direct exposures to travel, Air New Zealand and Auckland Airport, very expensive, and hence are looking at other companies, such as Kathmandu, to gain exposure.
Pushpay was the best performing stock in the market index over the month on the back of announcing it has received several expressions of interest from investors wishing to acquire the company. Close behind was Air New Zealand as it has finally raised new capital to put it on a more stable footing – assisted by the gradual relaxation of travel rules. At the other end of the market index was Eroad, which suffered under the sudden resignation of its Chief Executive Officer, who is also the founder of the company.
Portfolio Performance
The New Zealand Equities Fund delivered a gross return of -1.22% over the month of April, outperforming the fund's market index return of -1.86%.
For the 12 months to the end of April the New Zealand Equities Fund delivered a gross return of 1.22% outperforming the fund’s market index return of -5.98%.
Whilst the fund was overweight, the best performing stock Pushpay was underweight the next best performing in Air New Zealand which more than offset that gain. Strong relative (to the market index) performance came from underweight positions in F&P Healthcare and A2 Milk, assisted by an overweight in Channel Infrastructure (formerly Refining NZ). Against this, our relative positions in Sky TV, Port of Tauranga and Fonterra hurt relative performance.
Outlook
We think risks to the economy and company earnings are building. The strong employment backdrop is the last powerful driver of the economy that has not started to weaken. Despite the very strong employment position, consumer confidence, as measured by surveys, is at a very low level.
The gradual fall in the market over the past 18 months has removed some of the valuation headwind we saw, but risks remain if companies start downgrading their earnings expectations. In our view, most company valuations are not yet “cheap”, but we are starting to find opportunities to increase our weightings in quality companies which we previously viewed as too expensive.
We continue to be patient with our exposures to border re-openings primarily Sky City and Kathmandu. We did not participate in either the Air New Zealand or Vital Healthcare equity raises, as we feel their prices are still not offering value. We have increased our weightings in F&P Healthcare and A2 Milk as their share price falls have made them more attractive.
