HARBOUR INVESTMENT CHRONOMETER
AUSTRALASIAN EQUITY MONTHLY COMMENTARY – APRIL 2016
6 May 2016 | [email protected] | [email protected]| [email protected]
OVERVIEW FOR THE MONTH

The New Zealand equity market (S&P/NZX50) had another positive month rising 1.0% in April. However,
following March’s strong performance, the market underperformed global equity markets and
performance was concentrated in a narrow range of stocks. The Australian S&P/ASX 200 index rose
3.4% in Australian dollars (1.6% in NZ dollars), driven by a strong rebound in the resources sector.

Global equity markets also had a positive month with the MSCI World Equity Index up by 1.6% (in US
dollar terms), supported by continued accommodative central bank policy. US and Chinese economic
data was generally stronger, while European economic data remained mixed. Mining and energy stocks
outperformed globally as commodity prices bounced.

The Reserve Bank of New Zealand remained on hold at its April meeting, with a surprisingly more
hawkish tone to the message. We still anticipate a further cut in New Zealand interest rates. Key
company news item in the month was the approval by the Commerce Commission for the takeover by
Z Energy of the Caltex assets. Orion Healthcare made several positive contract announcements and
Fletcher Building found renewed investor interest after an investor briefing day.

In Australia, the resource sector was a strong driver of the market with commodities having their biggest
monthly gain since 2010. A weaker US dollar, better performance and data from the Chinese economy,
and some solid production reports out of the large miners, BHP and Rio Tinto were the key sector
drivers.
A BUNNY PHASE
Rather than being in a ‘bull’ or ‘bear’ phase, equity markets globally may be in a ‘bunny’ like phase, hopping
between advances and declines but generally moving a little higher. We expect volatility to rise.
The cut in interest rates by the RBA in early May has set a course for further cuts in New Zealand. Lower
interest rates will maintain a strong interest in yield oriented stocks.
However, in our view stock picking and growth sectors still have the most long term potential to add value.
And relative valuations for most growth stocks are attractive. We anticipate more merger and acquisition
activity, our view is a number of smaller and mid-cap stocks are priced attractively. We still especially like
the tech sector, and although the takeover of Diligent was opportunistic, most of New Zealand’s tech
companies are putting runs on the board, with valuations relative to revenue, and in some cases earnings,
looking good on a global basis.
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Overall, the New Zealand equity market is fully priced. But ongoing global monetary policy stimulus may
mean the New Zealand market may remain fully priced in the near term. In a world of low interest rates
investors continue to pay a premium for stocks with high earnings certainty and sustainable dividend yields.
A number of New Zealand stocks have high earnings certainty, but low earnings growth. By market
capitalisation, low volatility and high yielding stocks dominate the New Zealand market. In our view these
stocks need interest rates to stay low in perpetuity to support their current stock prices.
Some of these stocks are also challenged by potential technological change, and it is hard in some cases to
fundamentally support current share prices into the future.
In a general sense New Zealand domestic economic conditions remain supportive for company earnings
growth. Business confidence is high in New Zealand. Australian business confidence has also increased to
strong levels, with employment intentions at a 5-year high which is consistent with ongoing 2%pa jobs
growth. We continue to skew the portfolio towards offshore earners, because they have the highest relative
growth prospects.
The Australian market remains fairly valued. While Australian earnings expectations remain below average,
the range of potential earnings outcomes remains wide. Pending Australian general elections may result in
increased business, consumer and investor uncertainty. However, the recent cut in interest rates is likely to
provide a further buffer for confidence.
While there has been a recovery in the pricing of some commodities, in our view most commodity markets
remain difficult to read. Increased stock prices in a number of resource stocks over the last six weeks most
likely more than captures the move higher in commodity prices. There is still significant uncertainty as to
how sustainable the recovery iron ore prices will be.
We think that concerns about the Australian bank sector have been over stated. However bank stocks prices
may remain volatile as solid revenue growth is offset by increasing bad and doubtful debt provisioning. Bank
regulatory capital requirements are also unclear, casting a shadow over the potential for organic growth
without the need to raise new equity via dividend reinvestment. ANZ has announced a cut to their dividend
and a rebasing of earnings. Our preference is to look elsewhere for growth opportunities and we remain
significantly attracted to the asset managers.
Focused on structural growth
The portfolio remains skewed to structural growth investments in the healthcare, information technology
and non-bank financial sectors. We maintain this portfolio skew as these are the sectors with high earnings
growth, whether economies are slow or strong. We expect capital market volatility will re-emerge, and
remain higher than it has done over the last three years, as investors anticipate monetary policy change.
Sectors that benefit from positive structural change should continue to deliver relatively strong returns in
such an environment
The portfolio continues to favour idiosyncratic growth stocks that are profitably and sustainably gaining
share of the economy and growing cash flow and earnings. Our focus is on companies that benefit from
secular growth, which benefit from technology change and companies with the potential to increase
earnings sustainably ahead of the wider market.
Andrew Bascand, Shane Solly, Craig Stent
6 May 2016
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The Australasian Equities Commentary is provided for general information purposes only. The information is given in good
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