Each year, the NZ Herald canvasses well-known brokers for their 'tips' for the year ahead. Similarly, the retail investor community does the same, drawing in about 200 individual investors to make their predictions for the upcoming year.
The game is insightful – both in terms of 'crowdsourcing' potential opportunities, but also to understand investor behaviours in the face of economic predictions for the year.
A couple of technical points to set the stage - the game starts with closing prices of 2019 (on December 31). To maintain comparison with the NZX50 benchmark, all returns calculations include dividends and a calculation to include value from rights issues.
At the time picks were made, Covid-19 had not registered. So, how are things panning out?
So firstly, let's remind ourselves of the picks for 2020.
The "Sharetrader Top 5" were the most popular selections made by a retail investment community of about 200 individual investors, while the other selections are made by more well-known broking firms.
Selections were made before December 31, 2019 – at a time when there was no hint of what was to come during the first quarter of 2020.
From an individual company perspective, A2 Milk featured highly, picked by all except MSL Capital. The company has grown strongly for the last three years and is still highly favoured by investors.
Bay of Plenty politicians support 20 per cent pay cuts
Four things politicians should be thinking about right now
From a sector perspective, however, there is perhaps some clue that investors were taking a cautious approach heading into 2020 (well, if I'm being charitable). As well as A2 Milk, the healthcare sector was also picked five times, with brokers selecting between Ebos, AFT Pharmaceuticals and Fisher & Paykel Healthcare, while individual investors had their eye on Dunedin-based Blis Technology.
Of course, all of those companies were underpinned by strong growth prospects, which was possibly more in the mind of investors than a single-line news report about a new disease that had appeared in a corner of China.
Retirement village operators, represented by Arvida and Oceania Healthcare, were selected four times, while software developers were also picked four times (ERoad, Plexure and Serko).
All returns figures calculated as at April 14.
Quite a lot.
The NZX50 has fallen by a significant 11.6 per cent, with only 10 companies generating a positive year-to-date return.
But the focus on Healthcare and A2 Milk implied in the broker selections has been somewhat prophetic. Healthcare sector shares feature three times in the top five performing shares on the NZX so far this year, with A2 Milk also appearing in fourth place.
Had investors known that Covid-19 was on the way, its possible that Telco selections may have rated more highly – Chorus has had a strong run to appear in fifth place (with a year-to-date return of 11.4 per cent) with Spark seventh. Infratil (part-owner of Vodafone) has been less successful, thanks to the conglomerate nature of its investments.
Software developers featured highly in the picks. The fortunes of individual software is mixed, tending to follow the key industry they serve.
For example, the travel restrictions in place globally have not been good news for Serko, with its shares falling by nearly 50 per cent so far this year. On the other hand, Pushpay Holdings has been an oasis of relative calm, with a 2.5 per cent increase year-to-date as its underlying payment software maintains high usage in its US church-focused customer base.
The performance of the retirement village sector has been the subject of a previous analysis , with investors taking a negative view of the sector in the short-term. Arvida has been the pick of a poorly-performing bunch, with its returns to investors this year at negative 27.9 per cent.
The electricity sector always features highly in any discussion on the NZX – but it has not been immune from the Covid-19 fallout, with an average decline of around 10.5 per cent so far this year (slightly ahead of the benchmark NZX50 index). While not one of the major 'gentailers', Tilt Renewables has been the pick of this sector so far this year, only costing investors 2.5 per cent.
At the other end of the scale, it's no surprise to see travel and tourism-related shares (Air New Zealand, Tourism Holdings) and media shares (Sky TV, NZME) at the bottom of the list, with losses between 50–65 per cent for investors.
Drum roll, please. Well, for the first few months of this turbulent year ...
Christchurch-based broker Hamilton Hindin Green is leading the broker pack so far – albeit with some close competition with Forsyth Barr, the retail investor community and Craigs Investment Partners.
It is a somewhat pyrrhic victory, though, with all YTD returns being strongly negative, something reflected by Grant Davies from Hamilton Hindin Greene; "It's not exactly a back-patting kind of environment we're operating in right now".
Hamilton Hindin Greene's selections featured two from the healthcare sector (Ebos, Fisher & Paykel) as well as A2 Milk. "Our picks reflect a focus on both sector diversity and underlying quality", reflects Davies. Good rules for any investor. He's also keen to point out that equity investing is a long-term game, with above-average returns compared to other investment types.
At the other end of the scale, Jarden has been heavily impacted by the negative impact of the retirement sector and Kathmandu.
Within the retail investor game, the current leaderboard is dominated by those who selected healthcare shares and A2 Milk. My congratulations to 'soi6', whose selections have earnt a 10 per cent return so far this year. Their selections include A2 Milk, Blis Technology and AFT Pharmaceuticals.
The quality of listed entities has many different elements, each of which assumes a different level of importance according to the macro-economic environment. The old adage of 'cash is king' is reflected in the most successful listed organisations right now. For example, a high operating cash flow has allowed A2 Milk to increase its shareholding in Synlait recently, at a price far less than it would otherwise have paid.
Organisations with high debt relative to assets, or high debt servicing costs, are more at risk of producing negative returns for investors – a natural consequence of reduced global demand impacting asset values. We've already seen companies (Kathmandu, Auckland International Airport) reach out to investors to inject more equity into their business to retire debt and shore up their balance sheets, an action that should serve them well beyond Covid-19.
NZX equities have taken a hammering this quarter, following nearly a decade of consistent growth for investors. In the midst of tough times, it's worth remembering that a long-term investing strategy focused on diversity and quality will play out well over time.
Many investors, unused to the current volatility, are getting nervous at the fall in their KiwiSaver balances or of those shares they directly hold. In fact, there's probably a whole bunch of people in KiwiSaver who don't recognise themselves as investors.
Most market commentators, and the Financial Markets Authority, are clear in their advice: now is not the best timing for investors to sell their holdings or transfer their KiwiSaver investment away from equity.
So well done to Hamilton Hindin Greene and 'soi 6'! We'll be eagerly awaiting how the next few months plays out for the broker community and retail investors.
Disclaimer - It's a game
Readers should recognise that the results of the Brokers Picks are skewed by some features of the game. The figures exclude brokers fees. 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, need for income or tax circumstances. The views expressed do not constitute personalised financial advice and are not directed at any person. Finally, past performance is no guarantee of future performance.