Genesis Energy has benefited from high rainfall. Photo / Supplied
Genesis Energy has benefited from high rainfall. Photo / Supplied
The consensus is that the New Zealand economy will slow this year, so what will that mean for the sharemarket?
If there are two successive quarters of negative GDP growth, that will constitute a recession.
The Reserve Bank’s monetary policy statement projections, published last November, have GDP declining by 0.5per cent in the June quarter and by 0.3 per cent in the September quarter. The central bank sees a return to modest growth in 2025 after a mostly flat 2024.
While a slowdown has been widely forecast, Adrian Allbon, director, equity research, at Jarden, said the sharemarket may prove resilient as many of its bigger stocks are not closely aligned with whatever happens to the domestic economy.
This year has kicked off with strong support for Fisher & Paykel Healthcare, for example, following on from last week’s announcement that it expects its 2023 full-year operating revenue to be about $1.55 billion to $1.60b.
The respiratory products maker – the market’s biggest stock by market capitalisation - also reported that it is seeing increased sales of its hospital hardware and consumables in China.
Auckland International Airport has also performed strongly so far this year, while talk of its possible inclusion on some MSCI indices has boosted Ebos Group’s share price.
“Those three stocks represent a big proportion of the market when you add them up,” Allbon said.
“They have left some of the other stocks, like Spark and the gentailers, in their wake,” he said.
Aside from talk of recession, Allbon says the real issue facing the market is house prices, and their connection to the performance of the aged-care stocks Ryman, Summerset and Arvida, as well as construction firm Fletcher Building.
Ryman has already taken a hit from falling house prices. The stock rallied this week to around $6.50 but is well short of its mid-2021 peak of $15.80.
Allbon says former high-flier a2 Milk sits somewhere between positive and negative influences.
“Definitely, the management turnaround story has got traction,” he says. “But the big issue facing a2 Milk is that the market is structurally declining in China (its biggest market).
“It’s not the US$20 billion, 5 per cent a year growth market that it used to be.”
On the whole, Allbon sees a positive backdrop for New Zealand equities.
“Interest rates have probably done their worst,” he notes. “And some of these big growth stocks - F&P Healthcare, a2 Milk and Mainfreight – have had their reset in 2022.”
While the threat of a recession was a worry, Allbon said stocks with high exposure to a local downturn do not represent a large part of the S&P/NZX50 index. Both F&P Healthcare and a2 Milk derive most of their earnings from exports.
This year has kicked off with strong support for Fisher & Paykel Healthcare. Photo / Supplied
Allbon noted that the generator-retailers or gentailers - a big part of the S&P/NZX/50 index - are relatively defensive in the face of a recession.
And those with high exposure to a domestic downturn - the housing-related stocks and retailers - represent only about 10 to 15 per cent of the index.
He says the big names should therefore be relatively insulated from a downturn.
“Don’t get me wrong, the market is exposed to rising interest rates,” he says. “But that was the 2022 story.”
Property in 2023
Last year was a turbulent one for listed property vehicles, said broker Forsyth Barr.
The broker noted that the sector was down 26 per cent in the year as it adjusted to higher interest rates.
“Valuations remain above historical relationships with bond yields, and the growth outlook has moderated, as such we remain cautious on the sector despite the 30 per cent discount to net asset value,” Forsyth Barr said.
Among the themes Forsyth Barr expects to play out for property this year will be the end of strong rent growth.
Debt costs remain a headwind to earnings growth and balance sheets will come into sharper focus, it says.
Transactions will finally provide evidence to back up valuations, after a lack of big deals in 2022 kept changes in asset book valuations to a minimum.
Forsyth Barr said there could be corporate and portfolio activity as the sector is trading at its largest discount to net tangible asset backing since the GFC, reflecting the market’s concerns about asset valuations.
Hydro power
Genesis Energy has benefited from record hydro generation in the first half, to the point where Forsyth Barr expects the power generator and retailer to record first-half earnings before interest, tax, depreciation, amortisation, and financial instruments (Eitdaf) of $312m.
“The second quarter of its 2023 financial year was as good as its first quarter, from a hydro perspective, and so the lack of a guidance upgrade is disappointing,” it said.
Higher operating expenses and lower earnings from the Kupe gas field were the main reasons for the lack of an upgrade, Forsyth Barr said.
Genesis is due to report its first-half result on February 27.
Mercury confirms
Mercury has confirmed its full-year Ebitdaf guidance of $620m or normalised Ebitdaf of $795m after adjusting for the non-cash unwinding of acquired swaps relating to the Norske Skog, Tilt and Trustpower transactions.
Very wet conditions across the Waikato catchment have lifted 2023 hydro production forecasts to 4700 gigawatt hours from 4500GWh, the company says.
The additional hydro production has mostly been generated during the second quarter, when spot electricity prices were low due to nationally wet conditions.
Mercury said the integration of the Mercury and Trustpower retail businesses was ahead of schedule, but that this was pulling forward integration costs from future years into the 2023 full-year.
Mainfreight slippage?
Logistics firm Mainfreight is due to issue a trading update early next month.
Forsyth Barr expects the firm to highlight some slippage in weekly profitability in its Air & Ocean (A&O) operation, broadly offset by further gains in Transport (also boosted by the seasonal peak) and Warehousing.
“Significant sea freight spot rate declines will hamper A&O revenue progression, though the impact will be cushioned by more resilient sea freight contract rates and airfreight rates,” it said.
Forsyth Barr has retained its “outperform” rating on Mainfreight.
