Amid the broader industry cycle, electric vehicle adoption in New Zealand has slowed considerably, Forsyth Barr says. Photo / NZME
Amid the broader industry cycle, electric vehicle adoption in New Zealand has slowed considerably, Forsyth Barr says. Photo / NZME
The New Zealand sharemarket has lagged behind its overseas peers, but could it be at a turning point?
The market has already been on the move, but this week’s lower-than-expected inflation read, coupled with last week’s slight change in stance from the Reserve Bank, have been taken as aplus by equities investors.
Bank economists now expect the Reserve Bank to cut the official cash rate, currently at 5.5%, in November.
There’s an outside chance it could happen sooner than that.
“What you are seeing from our sharemarket is probably a sign of things to come,” Craigs Investment Partners investment director Mark Lister says.
“There has been that shift in tone from the Reserve Bank, more evidence that economic activity is weakening, and more importantly that inflation is slowing more than expected, so interest rate cuts are just around the corner,” Lister said.
“They will happen sooner than people expect, and our market is responding to that because it has been suffering for the last three years under high interest rates.”
The local market is more sensitive to interest rate moves because of the high proportion of dividend-paying yield stocks.
“My expectation is that the market will continue to rebound and recover in anticipation of those OCR cuts,” he said.
“By 2025, the economy won’t respond immediately but it will in time. Investors will be wise to move quickly to position for that.
“The sharemarket is responding today and investors can’t afford to sit on their hands. They have to move in anticipation because the market moves in anticipation.”
Even so, Lister says the economy remains in a difficult space.
Corporate earnings will look pretty subdued in the August reporting season, and Lister expects conditions will stay tough for the balance of the year.
“But the market is not pricing stocks for the next six months - it’s pricing stocks for the next few years. So yes, it’s at a genuine turning point.”
Reporting season looms
Jarden Securities, in an earnings preview of 37 companies expected to report results over August, said most would be reporting against the backdrop of deteriorating economic conditions, reduced government spending and high interest rates.
“Whilst we expect economic momentum to remain negative for the balance of calendar 2024 and hence be problematic for earnings and outlook statements, the silver lining emerging is evidence inflation may be returning to the target level and we are entering rate cut territory potentially as early as August but more likely from November,” Jarden said.
In its preview, Jarden said there had been no earnings upgrades from companies but there had been various downgrades, including early downgrade guidances for 2025 from Sky City, Genesis, and Contact.
“On the upgrade side, we see modest potential from a2 Milk and, based on their operating statistics, beats by Mercury and Contact.
“On the downgrade side already, we call out Spark, Fletcher Building, Air New Zealand, Sky City, Tourism Holdings, Michael Hill, Steel and Tube, and Comvita.”
Contact Energy has already given an early downgrade guidance for 2025.
Into the results, Jardon said it was “cautious” on Vulcan Steel and Air New Zealand.
For Auckland Airport, Jarden’s estimates sit above consensus “and there are lots of factors to play out”.
“We are factoring in a dividend cut for Spark but the company’s response is likely to include a caveat on data centre ambitions and adherence to investment grade thresholds.”
Likewise, for Precinct, Jarden has factored in a dividend cut.
Jarden noted that Ebos typically does not provide earnings guidances.
The broker expects to see dividend policy updates from Meridian, Chorus, Vector, Heartland Bank, and Summerset.
Jarden expects Chorus to give an update on its capital management review.
Watershed for Meridian
It’s been a watershed year for Meridian Energy following the signing of the landmark NZAS contract and a strong operating performance that will deliver record earnings before interest, tax, depreciation, amortisation, and financial instruments (ebitdaf), Forsyth Barr said.
“Whilst MEL’s June 2024 performance was solid, it was down on recent months as dry hydro conditions impacted earnings; we expect the trend to continue into 2025.
“The flipside of lower hydro generation is high wholesale electricity prices, which should help lift 2026 and beyond earnings.”
Forsyth Barr retained its “underperform” rating on Meridian which it says is the most expensive electricity stock.
EV update
New car sales, typically a barometer of economic activity, have fallen to anaemic levels in New Zealand as consumers feel the pain from cost inflation and high interest rates.
Used car sales have also been muted, although the second-hand market has generally been more resilient due to trading-down trends.
The outlook for the industry may finally be improving, with the RBNZ signalling rate cuts are on the horizon, Forsyth Barr said.
“Listed operators who have weathered the storm, including Turners Automotive Group, should be beneficiaries of improved consumer confidence and expanding finance margins as the cycle turns,” the broker said in its EV update.
Amid the broader industry cycle, electric vehicle adoption in New Zealand has slowed considerably, driven by regulation which has removed incentives for purchasing new EVs and imposed new costs for EV owners.
Data from the Motor Industry Association showed the recent trend in declining new vehicle registrations continued for the fourth consecutive month in June.
The 9423 registrations represent the lowest sales in over a decade, down 60% lower, year-on-year.
EV registrations in New Zealand fell to just 4.2% of total light vehicle registrations in the first six months of 2024, after peaking at 27.3% in December of 2023.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
