NZ market outpaces overseas rivals for second year

12.00pm

After a glittering year on the world stage last year, the New Zealand sharemarket seemed pale by comparison in 2002.

Last year saw the NZSE-40 gross index soar more than 8 per cent as many overseas equities crumbled. This year the index inched down 0.9 per cent.

Yet the New Zealand sharemarket still managed to outperform other markets this year and for those watching closely, there were bargains to be had.

The market has also had a dramatic casualty rate, as seen in the savage halving of Tower's value, the beat-up of Baycorp Advantage, and the near derailing of Tranz Rail.

Asked if it was a boring year, Macquarie Equities' investment director Arthur Lim reacted swiftly. "I couldn't disagree more, actually."

His figures show that taking currency changes into account, a $100,000 investment in the New Zealand gross index this year would have left the punter with $99,100 -- but that outperformed the Nasdaq ($49,000), the Dow ($63,600), Australia's S&P/ASX 200 ($76,000) and the British FTSE ($64,400).

In real terms, the Dow Jones and ASX lost nearly 14 per cent, the Nasdaq 28.5 per cent and the FTSE 23.6 per cent.

"Whilst our market looks like it's been relatively flat, one has always to talk about related performance," said Mr Lim. "It's nothing short of superstar performances, really."

For Mr Lim, 2002 was a year when stocks came back to realistic values. "In previous years we had a lot of corporate activity, and I think there was a bit of an artificial environment."

This year stock picking was a lucrative sport for the smart punter, with the best performer being Designer Textiles, whose share price rose 169 per cent in the year to December 17.

Retail newcomer Briscoe Group was directly behind at 103 per cent, and blue chip stocks such as Sky City, Fletcher Building and Auckland Airport were no slouches either, gaining 42 per cent, 27 per cent and 21 per cent respectively.

Other market favourites had more of a lacklustre year. Shares in the Warehouse managed a steady 14 per cent, but Carter Holt Harvey (3.89 per cent), Contact (2.88 per cent) and Telecom (-6.66 per cent) had a mediocre year.

Telecom, which had been a top pick last year, failed to live up to its promise when later in the year it was punished by investors for its lack of progress in Australia and a weak earnings outlook.

Rob Mercer, head of research at Forsyth Barr Frater Williams, says at the start of the year, people were hoping telcos would improve, and Telecom was doing comparatively well.

But during the year it made no significant investments, and its ability to defend itself against Telstra in an increasingly tight Australian market seemed to be getting weaker.

"Telecom's businesses aren't delivering proper growth above the average that's being achieved in the market at the moment. I think it's going to struggle (share price wise). There needs to be quite a shift in perception of long-term earnings outlook and we've pulled back our view here."

And for other stocks like Tower, Baycorp and Tranz Rail it was an annus horribilis, as investors reacted badly to warnings of losses or failed expectations.

Tower, which lost a whopping 62 per cent of its value, slid after investors took fright over warnings of a $30 to $40 million year loss in November. In fact, Tower posted a net loss of $74.95 million earlier this month .

Baycorp also had a bumpy year, losing 72 per cent as it came up against increased competition in Australia, a flattish earnings forecast and a $10 million payout to a former Data Advantage executive.

As for Tranz Rail, its sharemarket value tumbled 75 per cent as the rail company reshaped itself primarily into a freight company.

From a high of $4.24 in March, the company hit a year low of 93c in December after scares about its financial restructuring and a $66 million rights issue, although those steps are tentatively thought to have put it back on track.

Looking back, Mr Lim counts this year's highlight as the introduction of continuous disclosure and a toughening up of securities regulations.

He mentions "GPG being forced to go for 50 per cent of Rubicon when previously it could have bought whatever it wanted at the price it was offering"; PPCS' punishment by the courts for the way it dealt with Richmond; and the new regime which requires companies to disclose material information to everyone at the same time.

The Stock Exchange also moved to clean up its image. The lack of listings which worried market participants last year has begun to be addressed by the exchange's new broom, Mark Weldon, who took up his position in June.

A merger of the under-performing New Capital and secondary markets is underway, as is a more controversial bid to switch the benchmark NZSE-40 capital index to a free-floating NZSE-50, to make New Zealand shares seem more attractive to overseas investors.


Key factors for Mr Lim in the year ahead are New Zealand's strengthening currency and the uncertain global environment.

"From an economic point of view I think the factors that are going to determine how the economy goes in the next 12 months are actually quite finely balanced," he warns.

"On one hand, domestic conditions are still pretty good, especially in the housing and retail/consumption sector, but on the flip side, I think we're starting to feel the commodity and currency starting to have an impact."

All going well, he predicts New Zealand will continue to outperform other markets and that defensive stocks that deliver high dividend yields will do well -- Fisher & Paykel Healthcare, Contact Energy, Natural Gas, Sky City and Lion Nathan, to name a few.


If the world economy does improve in the next six months, Mr Lim also recommends stocks that are affected acutely by the global situation, such as Fletcher Forests and Carter Holt.

"Once upon a time, a strengthening New Zealand dollar automatically meant our export sector was going to get hit and hit hard. It would be fair to say in recent years the corporates have generally done a better job in terms of the foreign exchange position."

Companies which hedge themselves for longer periods gain a profit from a rising kiwi dollar, but also allow themselves time to adjust their cost of production, and give the market more time to absorb the changes, Mr Lim says.

Next year, Rob Mercer is hoping for good things from Fisher & Paykel Appliances, Fletcher Building, Auckland Airport, Waste Management and Hellaby Holdings.

He also believes any company with exposure to the resurrected Auckland economy will probably do well.

"Our view (of) the Auckland economy is that it will remain strong for some time."

But for Peter Stokes, a senior investment adviser for JB Were, New Zealand's sharemarket was still being driven by opportunism.

"At the moment, versus fundamentals, sentiment seems to have the upper hand, and investors can see the logic that fundamentals at some stage kick in, but trying to identify what that catalyst is is pretty difficult.

"I think it's fair to say that 2003 potentially could offer some highlights for investors but this is a market where you seem to get a second chance to get into some stocks."

- NZPA