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Jamie Gray is a business reporter for the New Zealand Herald and NZME. news service.

Stock Takes: Tumultuous year for markets

Trump and Brexit put pressure on yield shares
Donald Trump's proposals could indirectly benefit listed exporters if the US dollar strengthens. Photo / AP
Donald Trump's proposals could indirectly benefit listed exporters if the US dollar strengthens. Photo / AP

The New Zealand sharemarket has been buffeted by major events overseas such as the surprise election of Donald Trump as the next US president and the latest set of results and annual meetings have done little to guide the market in either direction as the year nears its end.

As it stands, the benchmark NZX-50 index is 654 points short of its record high, achieved in September, of 7571.11.

Post-Trump, US and local bond yields have been rising, putting downward pressure on the yield-sensitive stocks that make up so much of the New Zealand market.

This may continue to place near-term pressure on the stock prices of larger New Zealand companies such as Spark, Auckland Airport, Contact Energy, Z, Meridian, SkyCity, Mercury, Kiwi Property and Infratil that have benefited from capital flows chasing their relatively high, by global standards, dividend income yields. For the moment, the yield stocks have held fairly well.

Shane Solly, portfolio manager and research analyst at Harbour Asset Management, said global dividend yield funds in particular have been buyers of local yield stocks since the start of the year, but that the rise in global long term bond yields mean local stocks don't stand out to the degree that they once did.

On the flip side, the Republican win may benefit some other parts of the market.

"Potential US tax cuts and fiscal stimulus may boost US corporate earnings and may be positive for some NZ equities," Solly said. "The stronger US dollar, bringing with it a weaker kiwi dollar, will be good for local exporters."

It has been a tumultuous year for the markets, with huge swings inspired by Britain's decision to exit the European Union early in the year and then Trump's win -- both against the run of expectations. More turmoil may lie ahead before the year is out.

This Sunday sees Italy vote on changes to its constitution that are aimed at streamlining its political process to allow a restructuring of its ailing economy.

A "no" vote is seen as being bad for the eurozone, particularly if it means that Italy's troubled banking sector is not put right.

Further out, an expected rate hike from the US Federal Reserve after its open market committee meeting on December 13 and 14 is seen as a pivotal event for world financial markets. But for the moment, "sectoral rotation"-- investors switching out of yield stocks in favour of cyclical stocks -- has been the order of the day.

"Whether this rush into cyclicals has legs will be the next interesting question ," Salt Funds managing director Matt Goodson said.

"We have benefited so much from this desire for yield," he said. "Given the nature of our market it will be key as to how we perform relative to other markets," he said.

While the latest run of annual meetings and results has given few clues as to the market's future direction, there have been a few standouts.

High octane AGM

Shares in the alternative milk company A2 Milk have continued their high-octane run. So far this week the stock has gained 16c, or 6.6 per cent, to $2.55, having risen by 106 per cent over the last year. The renewed enthusiasm for A2 came from the company's annual meeting on November 22, when the company gave a positive operating update and outlook, driven by infant formula and fresh milk operations in Australia and China.

In the four months to October, revenue was at $155.2 million, compared to $79.3m in the same period of the 2015 financial year, which A2 said reflected continued growth in infant formula and milk products. A2's comments at the annual meeting has led to to an upgrade in forecasts and stock price valuations by the stockbroking analyst community.

Orion disappoints

In contrast shares in healthcare software provider Orion have fallen by 70c, or 39 per cent, over the last week to $1.80 after announcing a disappointing first half result and issuing a future profit guidance that was below market expectations.

Revenue was up by 9 per cent over the comparable preceding period. Management had been guiding for revenue growth of 20 per cent over the next year. Orion also used up a lot more of its available cash to support the growth than many had expected, and it is possible Orion will need to take on debt to support future growth.

Scales bears fruit

The New Zealand apple industry continues to be a success story. The sector is set to grow its largest ever export apple crop of 21.5m cartons worth a record $800m this season.

Just four years ago, the industry was producing 16m cartons. Shares in Scales have rallied after the company announced the acquisition of Longview, an established integrated apple production business. The stock last traded at $3.46, up 4.8 per cent over the last week.

Looking ahead

While signals from the local market have been mixed, Harbour Asset's Solly said further gains were possible as the end of the year approaches.

"We have seen a bit of that yield money flow out, and we might see a bit more of that, but the market has the potential to quietly grind up towards the end of the year."

- NZ Herald

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