Mark Lister: NZX50 weathering the financial storm

Opinion

New Zealand stocks holding up well compared to overseas counterparts amid chaos in global markets.

Amid the chaos we've seen in global markets over the past month, local shares have held up remarkably well. Nobody seems to have told the NZX50 that we are in the middle of the sharpest market correction since early 2012.

Most share markets reached their 2014 peak during the third quarter of the year, and while all have been sold off since then, some have fared far worse than others.

In the US, smaller companies have been the most affected, with the Russell 2000 now almost 13 per cent below the July peak, while the broader S&P500 is only down 5.2 per cent. The ASX200 in Australia is down 8.3 per cent since early September, while the UK and European markets are down by about 8 per cent.

However, the local market is just 2.3 per cent lower, even after removing dividends to compare apples-with-apples.

This might seem amiss, but there are a few genuine reasons our market should hold up better than others during periods of weakness.

For a start, our economic growth prospects are relatively intact, despite the collapse in dairy prices.

Europe is facing a 35 per cent chance of slipping back into recession, according to the International Monetary Fund, and while the US is performing well, the US dollar is rising and interest rates are likely to do the same next year.

These two latter issues have created some investor caution to offset the otherwise positive economic tone.

New Zealand is still in a relative sweet spot. Our growth is decent, albeit slowing, and we've seen the last of any interest rate hikes for some time. Our currency has fallen, so last year's headwind is about to become a tailwind for many listed companies.

Our market offers an average dividend yield of more than 6 per cent, well above what's on offer elsewhere. For investors highly focused on income, this provides a floor that sees buyers step in as share prices fall and these yields look better still. Finally, the make-up of our market is a big part of the reason we are less volatile.

Globally, energy, mining and financial sectors have felt the brunt of the sell-off. In the US, despite the "market" falling 5 per cent, the consumer staples and utilities sectors have actually managed to post rises over the past month.

In Australia, the dominant financial, energy and resources sectors (which make up more than 60 per cent of the index) have been some of the hardest hit, which has seen the headline ASX200 fall heavily. Other sectors, such as healthcare and utilities, have fared much better but these are under-represented in the headline index (only 7 per cent in total).

Of the 50 companies in the NZX50, 24 fall into what I would describe as defensive sectors, like infrastructure, healthcare, utilities and property.

These companies represent 58 per cent of the NZX50 by weighting, and they are inherently less volatile or economically sensitive than average.

This means they often underperform when markets are rocketing ahead, but come into their own during rough patches.

Conversely, I can count the energy, mining and financial stocks on one hand. A number of the other industrial businesses are exporters, so they are benefiting from currency weakness to offset challenges in end markets.

Mark Lister is head of private wealth research at Craigs Investment Partners. A disclosure statement is available on request. This article is general in nature and does not constitute personal investment advice.