Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Juicy Apple leads sharemarket revival

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Apple's quarterly revenue of US$39.2 billion is only slightly less than New Zealand's quarterly GDP. Photo / AP
Apple's quarterly revenue of US$39.2 billion is only slightly less than New Zealand's quarterly GDP. Photo / AP

A number of developments during the week, including Apple's second quarter result and central bank interest rate decisions, demonstrate why sharemarkets have become more attractive even in the difficult economic environment.

The Apple figures show that well known companies generate huge investor interest when they deliver great returns and the interest rate announcements indicate that rates should remain low for another 12 months or more.

This low interest rate environment encourages investors to look at more risky assets, particularly sharemarkets and companies with high dividend yields.

Apple's shares closed at US$607.70 on Thursday following the announcement of its second quarter result earlier in the week. Apple is the world's most valuable listed company with a market capitalisation of US$567 billion ($697 billion), nearly 12 times larger than all of the companies listed on the NZX.

A year ago Apple's share price was only US$350 and three years ago US$125.

The point about Apple is that we all know its major products, the iPhone, iPad and iPod.

The company has revolutionised the information technology sector and shareholders have benefited hugely as a result.

Apple announced second quarter earnings of US$11.6 billion, a 94 per cent surge over the same quarter in the previous year. It had revenue of US$39.2 billion for the quarter, which is only slightly less than New Zealand's quarterly GDP or total level of economic activity.

The company has made huge inroads into China, particularly with the new iPhone 4S which was only launched in the country in January. Chinese revenue has surged from just US$3 billion in its 2010 fiscal year to US$13.3 billion last year and a whopping US$12.4 billion for the first six months of the current year.

Apple's strong market position in China will be strengthened by the addition of China Telecom as a carrier in March.

Apple's worldwide unit sales have increased as follows:

* The company sold 35.1 million iPhones in the second quarter compared with 18.6 million in the same quarter in the previous year.

* iPad sales have gone from 4.7 million units to 11.8 million units over the same period.

Broker analysts are predicting that combined annual iPhone and iPad sales will increase from 104.7 million units in Apple's 2011 fiscal year to around 185 million this year, 260 million next year and 330 million in fiscal 2014.

Profit margins rise as unit sales increase and analysts are forecasting that Apple will lift its net earnings from US$25.9 billion last year to more than $60 billion in 2014.

Apple is not expensive, particularly when compared with the high profile Facebook IPO.

The company is on an historic price/earnings (p/e) multiple of 14.7 based on its last four quarters whereas Facebook is on an historic p/e of 102.7 based on its last four quarters and assuming it will have a market value of US$100 billion.

Apple is on a prospective 2014 year p/e of around 9.5 based on analysts' forecasts.

The innovative company has given a huge boost to the United States sharemarket - and indirectly to the world's markets - because it is so well known and has performed so well.

In addition information technology companies play a big role in the United States as demonstrated in the accompanying table.

The IT sector represents 20.4 per cent of the S&P500 Index with Apple, Microsoft, IBM, Google, Intel and Oracle all in the largest 20 companies group.

There is a lot of talk about the United States losing its number one position to China but its leading companies have huge worldwide presence and the sunrise sectors - IT, financials and healthcare - lead the US sharemarkets.

By comparison European sharemarkets are dominated by financials, consumer staples and healthcare with IT representing 2.7 per cent of the S&P Europe 350 Index.

The largest European company is Nestle, a consumer staples company in direct competition with Fonterra.

It is followed by HSBC (financials), Novartis (health care), Vodafone (telecommunications) and BP (energy). SAP is the largest listed European IT group.

The Australian sharemarket is dominated by financials and materials, mainly mining companies.

BHP and the four large banks fill the top five positions. They are followed by Telstra (telecommunications), Woolworths (consumer staples), Wesfarmers (consumer staples), Rio Tinto (materials) and Woodside (energy).

Healthcare represents 3.6 per cent and IT 0.6 per cent of the MSCI Australia 200 Index. CSL and Computershare are the largest Australian listed companies in the healthcare and IT sectors respectively.

The NZX is dominated by former government-owned companies with little or no offshore activities. Telecom, which has regained the top position from Fletcher Building, has almost no offshore activities nor does Contact Energy.

Fletcher Building has the largest overseas presence, SkyCity operates casinos in Adelaide and Darwin and Auckland International Airport has a shareholding in two Queensland airports.

However the big drawback of the NZX is that IT, financials and healthcare are underrepresented in the benchmark NZX 50 Gross Index. These NZX sector weightings are as follows:

* IT's only representative is Trade Me which has a 1.1 per cent index weighting.

* NZX and Heartland are the only financials with weightings of 0.8 per cent and 0.5 per cent respectively.

The healthcare sector has three companies in the benchmark index with Ryman Healthcare representing 3.8 per cent, Fisher & Paykel Healthcare 2.9 per cent and EBOS 1.0 per cent.

One of the positive features of the NZX is that it has a large number of high-dividend-paying companies. The NZX has a 4.8 per cent dividend yield according to Bloomberg compared with 4.7 per cent for the ASX and just 2.0 per cent for Wall St.

Investors become risk adverse when economic conditions turn negative and shift their investments from risky assets to low-risk fixed interest deposits. However when economies begin to improve the reverse happens, particularly when interest rates are low.

On Wednesday the US Federal Reserve Board announced that it would keep its federal funds rate at 0 per cent to 0.25 per cent and the outlook for the economy and inflation "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014".

Reserve Bank of New Zealand Governor Alan Bollard announced on Thursday that the Official Cash Rate (OCR) would remain unchanged at 2.5 per cent. The OCR is expected to remain at current levels until at least the beginning of 2013 and may go lower if the New Zealand dollar remains strong.

Next week the Reserve Bank of Australia is expected to drop its cash rate from 4.25 per cent to 4 per cent. A further 0.25 per cent cut is expected in mid-year.

A slow economic upturn with low inflation is probably the worst environment for bank depositors. Interest rates are likely to remain low in this situation and force investors to look at riskier, higher yielding investments.

These low interest rates, together with some excellent company results, have encouraged investors to shift from interest-bearing deposits to growth assets.

Investors are like creatures that have woken up from their winter hibernation. They are looking out of their burrows, noting that the worst of the bad weather is over and are slowly beginning to contemplate the more adventurous summer months ahead.

Let's hope their optimism is justified.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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