Wipe out - Piha South Beach on the west coast of Auckland. 07 January 2022 New Zealand Herald photograph by Brett Phibbs
This article contains the results for the 2023 Brokers Picks game. A new look 2024 Brokers Picks game will be re-launched in late January with a new format and new participants.
How should we describe the New Zealand sharemarket in 2023?
“In one word: weird,” says Andy Bowley, head of research at Forsyth Barr - the firm which tops this year’s Brokers Picks results with a 5.9 per cent total return.
“We meandered through the first part of the year in an environment with high inflation, rising interest rates but not too much of a slowing economy - that’s been more latterly, in terms of some of the anecdotes and the data and feedback from corporates.”
The top stock in Forsyth Barr’s 2023 picks was Infratil, with an 18.2 per cent return.
“Infratil has been a beneficiary of two mega trends and one mega deal,” Bowley said.
“The mega-trends being the inflation reduction act in the US which benefits the Longroad green energy business they have there. And the other mega-trend being AI in the context of their ownership of the CDC data centres.”
The mega-deal was acquiring the other half of One NZ (formerly Vodafone) from their JV partner. In doing so it was one of the few large-cap stocks that raised money for growth in 2023, Bowley said.
Forsyth Barr also benefited from picking Tourism Holdings, which delivered a return of 5.2 per cent.
Tourism Holdings made gains from consolidating its acquisition of Australia’s Apollo Tourism & Leisure 12 months ago as well as the steady post-Covid come back of the tourist market.
Forsyth Barr’s only stock to dip for the game period was Oceania Healthcare. Retirement villages, like Oceania Healthcare were one of those broader sector plays where that particular sector has been down in the dumps for some time. We saw a large capital raising from rival company Ryman Healthcare. Whether you agree or not it is heavily linked to the property cycle.
“If you look at the sector more broadly valuations are quite beaten up in price to book valuations. But all of these aged care players are trading below their book values,” Bowley said.
It was certainly a tough year for locally focused stock pickers.
Craigs Investment Partners grabbed second spot in the game with total returns of just 1.8 per cent.
Craigs’ investment director Mark Lister said he had expected 2023 to be a challenge, and opted for a safety-first approach by targeting quality businesses with resilient earnings and predictable dividends.
“Four of our five companies delivered as expected, with EBOS Group the only disappointment. In June it lost the key Chemist Warehouse contract to a rival that was willing to accept a lower price, and this saw the share price take a hit.”
It was still a great business, having delivered a return of 18.5 per cent annually over the past decade (more than double the NZX50 return of 9 per cent). However, it was much bigger than it used to be, “so growth might be a little harder to come by”, he said.
Mercury Energy was the strongest performer in the Brokers Picks game this year with a return of 19.1 per cent. It was top of the pack in what was broadly a good year for power companies (Meridian was up 9 per cent, Contact up 5.2 per cent and Genesis up 4.3 per cent).
MSL Capital picked that one but saw its total performance in the game undercut by big falls for more speculative picks like Rural Land Holding and Arvida.
Meanwhile, Jarden also saw solid picks (Infratil, Contact and Tourism Holdings) undercut by two of the worst performers in this year’s game - Delegat Group (down 32 per cent) and Pacific Edge (off 84 per cent).
Delegat was troubled by cost inflation, some destocking and small cap liquidity. Pacific Edge suffered from losing its Medicare coverage in an unprecedented fashion.
Of the general NZX50 performance - a total return of just 0.3 per cent - Jarden head of equity research Adrian Allbon noted the consequence of higher interest rates and an uncertain economic environment had “resulted in low trading volumes and a preference for large-cap companies mostly defensive to NZ economic conditions, but still sensitive to interest rates.”
The top 10 companies made up around 65 per cent of the NZX50, he said.
The NZX10 was up 1.6 per cent and NZX50 was flat.
“Hence, outperformance in 2023 largely came from positioning in these large core holdings, and underperformance coming from smaller cap companies,” Allbon said.
Craigs’ Lister noted that sharemarkets typically looked forward, and were usually running some 12 to 18 months ahead of the real economy.
“So some of the challenges could well be in the price already,” he said.
“The NZX50 peaked way back in January 2021 and last year [2022] it suffered the worst calendar year performance since 2008 with a 12 per cent decline. The past two years have been a case of a strong economy and a weak sharemarket, although I think we’ve moved into a phase where we’ll see a weaker economy and a more stable sharemarket.”
The New Zealand market didn’t mirror the economy either, he said.
“Instead, it’s dominated by large, mature, defensive businesses in the healthcare, infrastructure, utilities and real estate sectors. These types of companies often prove resilient when the economy is slowing, or when interest rate cuts are on the horizon, which could well be the case as the year progresses and markets start looking ahead to 2024.”
Looking ahead to the second half of 2023, he saw some cause for optimism.
“Inflation is slowing, interest rates are close to peaking, migration has picked up and we’re starting to see the labour market ease a little. I think the housing market decline is largely behind us, and some stability there will add to confidence. The election is creating some uncertainty, but we should see a pickup in activity once we put that behind us.”
Forsyth Barr’s Bowley agreed: “More recently what we’ve seen is this real positive shift in sentiment which coincides with the peak in bond rates and reasonably rapid decline from the peak in bond rates. The inverse being that the stock market both in NZX terms and offshore markets,” he said.
“If we look ahead to 2024 we’re a lot more optimistic generally than we were at the start of 2023.”
Readers should recognise that the results of the Brokers’ Picks are skewed by some features of the game. The figures exclude brokers’ fees. Percentage changes are total shareholder return (share price performance and dividends) for the game period, sourced from IRESS.
Brokers are asked to choose the securities that will give the best short-term performance. If they had been asked to choose, for example, a five-year term, the results might be different. The survey does not allow brokers to review choices during the year. The survey implies a one-size-fits-all approach. It takes no account of individual circumstances such as an investor’s appetite for risk, needs for income or tax circumstances.
This year we also introduced a minimum liquidity rule to ensure stocks chosen in the game are well traded throughout the year.
The views expressed do not constitute personalised financial advice and are not directed at any person. Some shares picked may include shares held by the company’s directors and staff. Finally, past performance is no guarantee of future performance.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
New Zealand's big power generators want to offset dry-year risk.