Why is the New Zealand sharemarket failing to fire? - Stock Takes

The New Zealand sharemarket has failed to fire this year. Photo / File

There’s been a stellar run for sharemarkets in the United States, Japan and Europe with fresh highs being hit. The S&P 500 has risen in 15 of the last 17 weeks - a record that has only happened once in the last 50 years - back in 1989.

But the New Zealand sharemarket is still about 13 per cent below its all-time high - hit during the Covid years in early 2021. So far this year the NZX50 index has gone virtually nowhere.

Mark Lister, investment director at Craigs Investment Partners, says its down to the types of companies listed on the New Zealand market and interest rates.

“All share markets in the world are sensitive to interest rates, all asset prices are - everything is linked to interest rates. But our share market is more sensitive than most. Because of the types of companies we have.”

While the US market has performed strongly it has been mainly driven by a small group of technology stocks.

“The rest of the market has actually been quite muted. Sectors like financials, materials, healthcare, consumer staples, energy, utilities - all of those sectors haven’t done much at all over the last 18 months. It’s not an across-the-board rally that we have seen.

“And our market just happens to not have many of those high-flying types of sectors - we don’t have the tech stocks.

“What we do have is all of those interest rate sensitive sectors and companies - lots of utilities, infrastructure - great businesses and companies but they tend to perform well when you have got interest rates that are low and stable or falling. And they don’t do so well when you have got interest rates that are going up like they have for the last two years. That’s hit us harder than most.”

Prior to the Covid pandemic it was the reverse situation.

“In the 10 years before that NZ shares beat international shares 7 out of 10 years. There was a long period where we were doing better than most. Interest rates were low and our high dividend paying stocks were doing well. The last few years the tables have turned.

What will it take for the NZ market to turn around?

Lister said it was all down to interest rates.

“I think you need to get to a point where central banks are starting to ease monetary policy - that would see investors all of a sudden take another look at the New Zealand share market.

“At the moment life is too easy in term deposits. But you will see that change. It might not be in the next six months. But this time next year - there’s a very good chance the OCR [official cash rate] is on its way down and it will continue to come down and at that point people will find themselves with their term deposits - they will go to renew it and will face a lower interest rate and they won’t like that.

“I think the NZ share market will come back into its own when you do see a change on the interest rate front.”

Financial markets believe the first OCR cut will come in November for New Zealand but they are pricing in June for the US, Europe and Australia.

“Investors are already positioning for those declines because they are only a few short months away. But when it comes to NZ people see that as being a lot further down the track - November is not far away - but it feels a lot further than June for fickle financial markets that do tend to get wrapped up in what is happening in the immediate future.”

The Tokyo Stock Exchange's Nikkei has hit a new all-time high recently. Photo / AP

Hedging your bets

For NZ-centric investors, the last year or two has not been fun.

“Investors who have put their money offshore have done very very well and investors who have hugged the New Zealand market have not really seen much action at all.”

On top of shares, the New Zealand property market has also failed to fire.

Lister said it was a reminder for people to invest globally to hedge their bets.

“Most investors these days have a much bigger interest in international shares. We do more business in international shares than in NZ these days and have done for years.

“No one should give up on the NZ market - we have got great businesses - it’s a very tax-efficient market - and it will have its day in the sun again. But the lesson is you’ve got to have a mixture of both.”

Fletcher Building shares have fallen of late but it is facing a mountain of challenges. Photo / Natalie Slade

Good time to buy NZ shares?

Even though the New Zealand market is out of favour with investors Lister said there were still opportunities.

“For people that have a one to two to three-year view and beyond there’s some good opportunities emerging... what I am telling a lot of investors to do is start taking advantage of those opportunities because a lot of stocks are trading at very reasonable valuations.”

A handful of stocks have hit 12-month lows in recent weeks including Ryman Healthcare, Heartland Group Holdings, Fletcher Building, Manawa Energy, PGG Wrightson, The Warehouse Group, Synlait Milk, Air New Zealand, Oceania Health, Kathmandu, Arivda, Move Logistics, Restaurant Brands and Pacific Edge.

Lister said some of those businesses deserved to be in the doldrums because they faced some real challenges - the likes of Fletcher Building and The Warehouse.

“Those probably aren’t the opportunities because they are facing genuine fundamental challenges. But there are lots of good quality stocks - the safe stocks - the boring stocks.”

Those include utility companies like telecommunications providers and power companies.

“Great businesses pay good cashflows. I want to buy those stocks today while people don’t want them because they are in term deposits.

“For me we should be taking advantage of that opportunity today so that we are already there when term deposits start to come down in 12 to 18 months’ time - that’s the point where you will see a big shift in all the money - so I want to be positioned there before that happens.

“I think 2024 is the year to buy NZ shares, before you get the shifting landscape.”