Why things are looking more rosy for the Australian share market. Photo / Supplied
The disparity between New Zealand's and Australia's monetary policy widened this week, with flow-on impacts on sharemarkets.
The Reserve Bank of Australia increased its cash rate by 25 basis points to 2.6 per cent - less than the 50 basis point rise the market was expecting.
That saw the Australian sharemarket rally by more than 5 per cent as energy, materials and real estate stocks rose.
Conversely, New Zealand's sharemarket was down 0.7 per cent yesterday for the week after the Reserve Bank of New Zealand increased the cash rate by 50 basis points and warned that it had also considered a 75 basis point rise.
Shane Solly, portfolio manager at Harbour Asset Management, said capital markets were waiting for a pivot to turn back into positive territory.
"That's when we get central banks changing direction from increasing rates to not hiking and reducing.
"Tuesday we had the RBA pivoting so the market got a bit excited about that. Investors were thinking 'are we going to see other central banks do something similar?' Well, Adrian Orr kicked that in that pants and said we are coming at pace."
Overnight Wednesday NZ time, San Francisco Federal Reserve Bank president Mary Daly also warned investors not to expect rate cuts in 2023.
Solly said markets were hoping for a scenario where there was a rapid increase in interest rates in 2022, the economy took its medicine, inflation dissipated and by the end of 2023 rates could be cut.
"This is the billion-dollar question within capital markets."
But Daly's comments poured cold water on that expectation.
Solly said the outlook for the Australian economy looked relatively attractive, with the Reserve Bank of Australia able to take a slower monetary tightening policy path, reflecting lower labour market pressure.
"They don't have the same inflation pressure and don't have the labour shortage pressure that other economies do."
Compared to the US, he said, Australia had opened its doors to migrants quite early.
Solly said the RBA had emphasised the risk of the global economy going into recession.
"New Zealand businesses are very active in Australia, they are highlighting it is easier to do business in terms of getting people to do things and demand. There is some major infrastructure investment programmes in train and they have got more to go."
Mining and resources had given Australia's economy a strong underpinning and the country was back to population growth.
"It is the lucky country. We are lucky it is one of our bigger trading parties and a bunch of our businesses have got good exposure there."
Solly said Australia was a far more volatile market than New Zealand but its valuations appeared more attractive.
The 12-month forward price-to-earnings (PE) multiple for the New Zealand equity market was currently 20.0x, 4 per cent above its five-year average of 19.3x.
Meanwhile, the Australian equity market was currently 13.4x, 8 per cent below its 14.6x average since 2007.
Fletcher earnings downgrade
House prices will plummet 24 per cent from a median of $925,000 to $700,000 but will start to pick up again by next March, a senior equity analyst says.
Grant Swanepoel, equity research director at Jarden, revised his forecasts for the housing market in an analysis headlined "faster is better", saying the recovery would start a little sooner than he had anticipated.
House price drops had been slightly faster than expected, he said, citing Real Estate Institute data which showed the national median falling from $925,000 last November to $800,000 by August. Swanepoel is forecasting prices to hit $700,000 before they go back up.
The REINZ index showed a 12 per cent drop, or 1.4 per cent a month during those nine months. But the analyst says all up, the drop will be 24 per cent before house prices rise again.
"Based on our investor model, due to the circa nine-month lag prevailing mortgage rates have on pricing, we believe the pace of monthly fall could accelerate through to March 2023. This would see house prices bottom in March 2023 at $700,000, a further 12 per cent below the current level," Swanepoel wrote.
The faster-than-forecast decline had triggered a revision to the outlook for building activity, which the analyst sees picking up around the second half of next year - nine months earlier than his previous forecast.
All that will have an impact on Fletcher Building because the company builds houses and supplies the sector with products. Operating earnings for the year to June 30, 2023 are now forecast to be $838 million, down from Swanepoel's previous $867m forecast.
Fletcher's operating earnings have been published by Bloomberg in a consensus of analysts' forecasts. Those are for the company to earn $788m in the year to June 30, 2024.
The global financial crisis saw an almost five-year building drought but that was a banking crisis while this downturn is an economic one, Swanepoel said.
"Banks are playing a role in the current down cycle with restrictive lending practices. However, these institutions are well capitalised and will be in a strong position to provide oxygen to the housing market when price declines near an end. This, combined with our view that there is still a fundamental undersupply of homes in New Zealand and a return of strong net migration, explains our short down cycle back to upper mid-cycle trading expectation," he said.
Swanepoel retained his "buy" rating on the stock but downgraded the target price from $6.43 to $6.30. Fletcher shares closed on $5.04 on Thursday.
Building cost inflation and natural disasters are continuing to weigh on the insurance sector but there are some signs of easing.
Forsyth Barr analyst James Lindsay this week noted that insurers continue to see the impacts of Covid, the Ukraine war and global supply chain issues pushing up claim costs.
"Anecdotal evidence, however, is that building cost inflation is moderating."
But less positive is the ongoing high claim costs for natural disasters.
Over the last 40 years the average annual claim cost has been $89m but for the past 10 years it has averaged $213m per annum and $256m for the last five years.
Already this year there had been eight significant claim events, including four which ranged between $12m and $16m each.
And it appears vehicle thefts are also on the rise, with AA Insurance reporting a 37 per cent increase in the year to June 30.
Lindsay noted listed insurers had seen a wide range of performances in their share prices in recent months, with only IAG having a positive return over the past three months.
Tower is down 3.8 per cent while Heartland Group was the worst performer at minus 14.7 per cent. Over the last year QBE's shares were the only ones to rise.
New Talisman Goldmines said it had begun detailed preparations towards implementing its strategic plan – with the aim of producing gold in 2023.
The company this week met industry specialists with a view to recommissioning the Talisman mine, near Waihi, and establishing a processing route for the ore produced from advancing the face of its Mystery vein.
A number of mining methods are also being assessed, including production of a concentrate underground, which has the potential to greatly reduce production costs and remove the need to transport ore large distances within the mine, the company said.
New Talisman said it was working on design and installation concepts to be tested against production volumes, gold recovery efficiency and costs.
John Upperton, who successfully agitated for governance and management change last year, stepped down as chair last month to become strategy delivery manager.
"We are determined to remain nimble in our approach," said Upperton, who remains on the board.
"By embracing innovation, while at the same time developing a safe working environment, we have been excited by the real possibilities emerging from our engagement with industry professionals."
New Talisman noted that the gold price this week lifted to just over NZ$3000 per ounce.
The directors have also agreed to extend the timeframe for closing the private placement announced on August 24 to the middle of this month.
Last year was a turbulent one for the company, involving breaches of NZX listing rules, a cancelled rights issue, FMA enquiries and litigation.
"The company has been through a rocky period, followed by the last year which has brought systemic change and disciplinary rigor to its governance," new chair Samantha Sharif said at last month's annual meeting.
"We consider the company to have turned a corner and is now in a position to concentrate on its core business," she said.
New Talisman shares last traded at 0.2c.
Private equity is seen as a likely buyer for Fonterra's consumer business.