Stock Takes: In the war of the asset classes, fixed interest is winning

Brokers Forsyth Barr has branched out from the world of stock picking and into sports. Photo / AP

There’s a war going on between fixed interest and equities, and fixed interest is winning.

The S&P/NZX-50 index dropped by 4.2 per cent in August, its worst month in just under a year.

The benchmark index is now down by about 16 per cent from its record high of 13,558.19, set on January 8, 2021.

In the meantime, interest rates are elevated, and look set to stay high for a while yet if central banks here and around the world have anything to do with it.

Craigs Investment Partners investment director Mark Lister said high interest rates, and the proximity of the October 14 general election, were weighing on sharemarket sentiment.

“August is typically a difficult month for markets everywhere,” Lister said, noting the US market broke its six-month winning streak last month.

“This month is typically the worst month of the year for international markets, so don’t be surprised if the volatility continues,” he said.

Interest rates are now at their highest in 15 or so years.

“Investors, particularly those who are looking for income, have so many more options than they used to have,” Lister said.

“If you think back two, three or even five years, if you were looking for income, you really did not have many choices other than to put your money into shares or property,” he said.

Salt Funds managing director Matt Goodson said the “battle” between the asset classes was anything but compelling.

At this point, the NZ Government Bond Index has delivered a total return of -0.25 per cent year-to-date, while the S&P/NZX50 Gross Index has returned -0.30 per cent.

“Cash and term deposits have been the winner in an environment where all domestic asset classes have struggled,” he said.

“The most interesting thing is that real bond yields have now returned to reasonably positive levels for the first time since the Global Financial Crisis.

“Ten-year inflation-indexed yields are now a little bit more than 2 per cent, so you’re actually getting paid in real terms to hold bonds for the first time in many years,” Goodson said.

The Reserve Bank’s official cash rate sits at 5.5 per cent, where the bank has forecast it to remain until early 2025.

Some economic forecasters expect a cut by late next year, but Craigs Investment’s Lister said he wouldn’t rule out even earlier cuts, particularly given China’s downturn and its depressing impact on the New Zealand dairy sector.

“You might see it happen sooner than people think if the Chinese economy slows by more than people expect.

“For investors, that could be quite a positive because as soon as people see these interest rates start to come down, I think you might see an investment behaviour change, which would be supportive for our sharemarket.”

Harbour Asset Management fixed income and currency strategist Hamish Pepper said bonds are typically viewed as “rainy day” investments.

“Being conscious of the uncertain outlook - an outlook where the global economy is slowing - I think what we are expecting is that bonds will have that role to play,” he said.

Harbour Asset, in a market commentary, said New Zealand and Australian sharemarket returns over the month were dominated by profit results, earnings downgrades and a sharp move up in long-term US and New Zealand Government bond yields, which increased the return hurdle required by investors and dragged on returns for defensive shares - including electricity utilities Mercury and Meridian.

August winners

Of the top 50 stocks, eight finished the month with positive or flat returns, while 42 saw negative returns, brokers Forsyth Barr said.

Top performers for the month included THL, up 9.3 per cent, SkyCity up 4.9 per cent and Fonterra Shareholders Fund up 4.8 per cent.

Pacific Edge (down 21.6 per cent), Synlait Milk (19.8 per cent) and Investore Property (16.1 per cent) performed the worst.

Season wash-up

Forsyth Barr said the June period-end earnings season has seen the highest proportion of earnings downgrades for at least a decade.

The downgrades have been broad-based, but primarily driven by opex and interest expense rather than revenues, it said.

“We have been in a downgrade cycle for some time, but what stands out this earnings season is that it has spread from economically sensitive stocks, such as retail and industrials, through to infrastructure,” Forsyth Barr said.

Of the 10 companies with the largest downgrades, four were infrastructure companies.

AIA exit

Auckland Airport (AIA) announced chief infrastructure officer Andre Lovatt has resigned after five years with the organisation to take up a new role at KiwiRail in December. A process is under way to find a replacement.

AIA chief executive Carrie Hurihanganui said Lovatt’s strong leadership skills and extensive knowledge in engineering have been invaluable, particularly as Auckland Airport has rebuilt its infrastructure team and ramped up the infrastructure development programme post-pandemic.

One fund manager said the timing was “interesting” given AIA is about to embark on the biggest phase of infrastructure investment since the airport was built.

Three major projects are now progressing across transport, terminals and AIA’s airfield.

Super buy

The New Zealand Super Fund has acquired a 4.99 per cent shareholding in Brussels-based Euroclear, a provider of critical financial markets infrastructure.

“With approximately €36 trillion ($65.7t) of assets under custody and over €1 quadrillion per annum worth of securities transactions, Euroclear provides post-trade services including transaction settlement, asset servicing and collateral management,” the fund said.

The Euroclear group includes Euroclear Bank, the International Central Securities Depositories, and operates the national Central Securities Depositories in Belgium, Finland, France, Ireland, the Netherlands, Sweden and the United Kingdom.

Euroclear Bank is the premier provider of settlement and related securities services for cross-border transactions involving domestic and international bonds, equities, derivatives and investment funds, the fund said.

NZ Super Fund head of direct Investments Will Goodwin said the transaction, which makes the NZ Super Fund Euroclear’s fifth-largest shareholder, provided a rare opportunity for the NZ Super Fund to increase its exposure to the global financial services sector.

Forsyth Barr on RWC

Brokers Forsyth Barr - which has Dunedin’s covered stadium named after it - has branched out from the world of stock picking and into sports.

In a glossy guide for the upcoming Rugby World Cup, the broker has applied its analytical skills.

Managing director Neil Paviour-Smith, writing in the “Rugby and Markets” foreword, said developing the publication allowed the broker’s team of research analysts to apply their skills in a novel way.

“Ahead of the 2011 Rugby World Cup, the team has developed the Forsyth Barr Tournament Prediction Model and will proudly tell you that it has a 67 per cent success rate since its inception,” Paviour-Smith said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.