Stock takes: Fed rate hike a milestone for world markets

US Federal Reserve chair Janet Yellen's projection that rates may rise three more times next year was more aggressive than expected. Photo / AP

US Federal Reserve chair Janet Yellen's announcement of an official rate hike marked a significant milestone for the world's financial markets.

In one of the year's most anticipated market events, the Fed raised its official fed funds rate by 25 basis points to a range of 0.5 to 0.75 per cent.

While the hike came as a surprise to no one, the Fed's projection that it could raise rates three more times in 2017 was seen as a more aggressive, or hawkish, stance than was generally expected.

On the day, the Dow Jones industrial average fell 118.68 points, or 0.6 per cent, to 19,792.53, but analysts said the fall was more in response to concerns that the post-election rally might have been overdone, rather than the Fed's long-awaited move.

More importantly, the US 10-year bond yield bumped up to 2.57 per cent for the first time since 2014, giving investors yet more evidence that world interest rates are finally on the move after a seemingly interminable post-Global Financial Crisis hiatus.

At 0.5 to 0.75 per cent, the fed funds rate is still a long way short of the 3 per cent norm but as yields continue to rise, New Zealand stocks, which have enjoyed strong support in a low interest rate world post GFC world, may lose some of their flavour.

NOT A WASHOUT
Harbour Asset Management portfolio manager and analyst Shane Solly said the New Zealand market had been underperforming other sharemarkets for the last three months as investors switched out of yield stocks and into cyclical stocks.

"At the margin, we may see less capital coming into New Zealand," he said. "It's not a washout, but New Zealand may continue to underperform in the aftermath of this (rate hike)."

BUT STILL CHOPPY
Bernard Doyle, chief investment officer at JBWere, said world markets could well be in for a typically choppy end to the year but that the local market, with its over-representation of defensive style stocks, could find support as investors look to play safe.

"I would not be surprised if we saw world markets go through a choppy patch," he said.

"I would not be looking at this statement [from Yellen] and getting more worried about New Zealand equities," he said. "Across this market, we are in reasonable shape and the next few weeks may highlight its defensive characteristics."

LOOKING AHEAD
JBWere expects the New Zealand economy to keep expanding next year, but that the challenge would be to improve the quality of that growth. Australia is set to grow at about 3 per cent helped by a rebound in the mining sector, Doyle said.

"Central banks will become less accommodating in both economies," he said. "We think equities will grind higher in 2017, with expected returns of around 8 per cent.
"We recommend a neutral stance in our key markets - New Zealand, Australia and rest of world. Earnings recovery will offset the headwind of rising bond yields."

SKYFALL
Investors looking for evidence that markets do not like surprises need look no further than Sky Network TV, which has seen its share price dive by 14.6 per cent in the aftermath of an earnings downgrade this week to close at $4.10 yesterday.

Sky TV said its operating earnings would be 5 to 7 per cent below the $296 million forecast in June.

It said forecast revenues were down slightly due to a reduction in subscriber numbers and a change in its customer mix. Sky TV is waiting on approvals to its proposed merger with Vodafone NZ from the Overseas Investment Office and the Commerce Commission.

The commission recently announced that it had extended the decision date on Sky's Clearance application from December 21 to February 23 next year.

HOME TO ROOST
Likewise Tegel's share price headed south after the chicken farmer said it would miss its earnings forecast.

The stock sank to the lowest they've been since the poultry firm listed on the NZX in May after the company said it would miss its forecast earnings as a glut of chicken kept a lid on domestic prices and rising freight costs squeeze margins.

The company's stock closed down Xc yesterday at $X.XX - below the $1.55 price sold in the initial public offering price.

Tegel said it expects annual underlying earnings before interest, tax, depreciation and amortisation of between $75m and $85m, down from projected proforma earnings of $87.4m for the 2017 year, while net profit will likely be between $33m and $41m, compared to a projected $45.6m.

FORBAR AWARD
Brokers Forsyth Barr has won the "Best Investment Bank - New Zealand" in the annual 2016 FinanceAsia Awards.

The award recognises Forsyth Barr's Investment Banking team's work on over 12 debt deals raising nearly $3 billion, six equity deals raising more than $500m and advice on public mergers and acquisitions totalling $1 billion.