The NZX 50 index underperformed offshore peer markets in 2021. Photo / NZME
OPINION:
It was a tougher year for the NZX 50 index in 2021, with it delivering -2.5 per cent total shareholder return (as at 21 December 2021) and underperforming offshore peer markets. Although this does come after a period of relatively high gains and there are a few elements at play behind the headline figure.
Rising interest rates over the tail-end of 2021 were a key factor dampening NZ market returns this year, with the NZX 50 populated by a high proportion of interest rate sensitive sectors.
Usually, increases to the Official Cash Rate (OCR) would see investors having the option to partly rotate to more value-based cyclical stocks, such as Sky City Entertainment and Fletcher Building.
However, this was complicated by Covid-19 restrictions from mid-August, carrying through to December for Auckland.
In our view, these external factors combined with high starting price-points for large companies like Fisher & Paykel Healthcare, Meridian Energy and Ryman Healthcare, dampened overall New Zealand market returns this year.
However, as we look ahead to Covid-19 reopening next year alongside continued inflation and rising rates, it can be helpful to reflect on some key index performers over the past few years.
Considering the position of these stocks heading into the pandemic, and how they've navigated through it, highlights areas for investors to consider in the new year.
While interest rates and the pandemic influenced markets, the stocks with the highest and lowest total shareholder return in 2021 present a year with no clear thematic direction.
The top performer for 2021, Skellerup Holdings, repeated its strong performance from 2020. It is now benefiting from investors' deeper understanding of its Original Equipment Manufacturer business model (supplier of critical components into industrial supply chains).
There is also growing awareness of the global nature of Skellerup's growth platform.
Sky Network Television has seen performance turn around this year, with a surge in recent months. This reverses four consecutive years in the lowest five stocks by total shareholder return.
At this point, Sky's rebound comes on the back of a better-than-expected outlook on the cost front. The company has the potential to sustain this turnaround and claw back further lost ground, but this is going to require it to demonstrate a sustained stabilisation of revenues.
It will take a few more years to see how Sky emerges out of the structural pressures it has been subjected to. These include the growth of streaming services and competition over rights to sports content.
The importance of robust direction through a changing landscape, as well as better diversity in earnings, is relevant to The a2 Milk Company, and its supplier Synlait.
These two companies in 2017 and 2018 were both top index performers. However, their fortunes changed with disruption to the unofficial 'Daigou' reseller trading channel to China, which was initially driven by border closures from the pandemic.
Beyond this, infant formula in the Chinese market is now facing a structurally lower growth outlook. Both companies have faced multi-year stock price resets and joined the underperforming side of this list over the last two years.
The maintenance of a2's brand health on a re-build of volumes will be important in its aim to return to sustainable growth over the next five years.
Looking towards consistent performers over past five years,Mainfreight has been a three-time top performer and has not been on the underperforming side during this period.
Through the pandemic, it's been able to capture share gain opportunities within supply chain pressures, in part reflecting the company's higher service offerings for its customers.
The strength of Mainfreight's position highlights the quality of its long-term growth opportunity, strategic focus, and track record on execution. This combination is also evident in Fisher & Paykel Healthcare and its investment performance over the past five years.
It's clearly also seen increased benefit from an uptake in its respiratory product demand during the pandemic and could see some 'normalisation' in this activity next year as this softens. Longer term, its growth prospects remain strong, and Covid-19 has materially lifted the awareness of its key hospital products.
After 10 years of strong growth, Ryman Healthcare has been a steadier performer in recent years. This changed in 2021 with Ryman joining the list of companies with the lowest total shareholder return.
Meanwhile, its peer Summerset Holdings is growing and has been a strong performer during the year. This highlights some of the constraints associated with Ryman's heavily indebted balance sheet.
Investors have been questioning how this impacts its ability to grow into its valuation in the absence of equity. For the first time, Ryman adjusted its dividend policy down in 2021, reflecting some of these issues.
Given the utility nature of Meridian Energy, it's surprising to see this company on either end of the performers lists. For us, this highlights the value for investors of price discipline from time-to-time, and in taking an active approach.
In 2020, Meridian's price benefitted from a combination of interest rates falling, and gaining certainty around the Tiwai aluminium smelter exit. Its price was super-sized at the end of the 2020 year by strong demand from exchange traded funds seeking exposure to listed renewable electricity generation, which is and remains relatively scarce.
Fast forward to 2021, and some reallocation within these passive funds led to a strong price reversion for Meridian – which was essentially beyond its control. This was coupled with the headwind of rising interest rates and a relatively flat dividend profile. Nevertheless, the company and its longer-dated earnings prospects remain largely unchanged.
When it comes to Covid-19 related change, Pushpay and Vista Group are examples of stocks that have been impacted by pandemic-driven factors in 2020 and 2021.
Pushpay had some of the highest returns in 2020, but with a step-change from strong entrenchment of digital giving trends, 2021 has proven to be a year of consolidation and product reinvestment. Additionally, the company is also transitioning through change on the leadership front and on its share register.
Almost the polar opposite, Vista battled through a difficult 2020 where a lot of its cinema operator customers were closed due to Covid-19 lockdowns. This left the company in need of additional equity raise support early this year. It started the year with a weak price, which increased throughout the 2021 year as its earnings prospects improved, and from a more secure balance sheet.
Vaccination progress around the world has also allowed cinemas to re-open across Vista's global customer set, and the company ended the year as a strong performer but just dipping out of 2021's top five from mid-December, as Omicron concerns have emerged.
Taking up Vista's spot this month was EBOS Group, which has performed strongly across the year. This is underpinned by its leading positions in Australia and New Zealand pharmacy and hospital consumables distribution, and animal care brands.
It is also strengthened by EBOS' scale acquisition of a medical device portfolio to bulk out its previous growth strategy and re-balance its existing group Healthcare segment.
We look ahead to the new year with pandemic restrictions easing under the traffic light system and international borders expected to open by the middle of the year (barring any major changes from the Omicron variant). Inflation and the OCR are also set to move higher and house prices could flatten or cool.
While being conscious of these macro-economic trends, we advocate investors should maintain a clear focus on the underlying position and direction of companies on a multi-year basis.
This has been a key determiner of performance for the NZX 50, whether before or during the pandemic, and we expect that to continue as we move into this new phase. It's also difficult to judge how much expectations for the economy have already been factored into share prices, given these external considerations seem easier to define with the past year as a starting reference point.
Covid-19 has shown us all that sometimes disruption comes from out-of-the-blue. A key lesson from the past five years on the NZX 50 is that the individual position and direction of companies is fundamental to how they withstand or find opportunities amid times of change.
- Adrian Allbon is director, equity research and Arie Dekker is managing director, head of research at Jarden.
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