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Technically Speaking: Low kiwi may cheat export sector-exposed investors

Friday 28th July 2000

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Air New Zealand class B

Owens Group

Tranz Rail Holdings

Ports of Auckland

Port of Tauranga

Auckland International Airport

Export-led recovery on a low kiwi dollar is expected to produce positive results for the economy.

To that end, companies that service the export sector should be a good bet as they assist in removal of rising export volumes to overseas markets.

This week's charts show weekly data for some such companies. Plotted on the charts are 40-week Bollinger bands, which track at a distance of two standard deviations above and below the 40-week moving average of price.

The charts are for two types of export servicers. The first are transportation firms, with examples from air, road and rail. The examples are Air New Zealand class B, which are the shares that foreign investors can hold in the airline, Owens Group, involved in road transportation, and Tranz Rail Holdings, the railway company. The second follows the ports through which exports flow. The examples are seaports in Ports of Auckland and Port of Tauranga and also Auckland International Airport.

The striking thing about the charts of these various firms is that share prices are generally weak. From the technical analysis view, many of the shares illustrated are trading at lower prices than they experienced in earlier times when the export outlook was not as favourable as it supposedly is now. A number of the shares shown are technically oversold in that they are trading around their lower Bollinger band.

The general position for exporting should be good. The US appears to have inflation under control and so may not undergo much more in interest rate increases. US growth should continue.

Europe is picking up speed and as yet has slack in the system in high unemployment to prevent a sharp tightening of interest rates. Japan is thought to be lifting from recession. The three economic superpowers, the US, Europe and Japan, should therefore be taking New Zealand along with them on a global economic boom.

Domestically, conditions should favour exporters. Farmers are basking in better weather than they have had in previous years. The kiwi dollar is weak and therefore gives our export customers good buying leverage.

Fuel costs, which are highly relevant to transportation firms, should come down as Opec countries heed US pressure to lift oil output and lower crude prices.

However, the share prices of companies that stand to benefit from all these pluses are not soaring.

Perhaps one superficially paradoxical reason for this is the export-boosting weak kiwi. While good for export sales, the low dollar threatens a delayed inflationary consequence through increased money supply as exporters repatriate higher overseas earnings and convert them into cheap kiwis. The concern could be that the Reserve Bank would have to take account of the export earnings risk in setting interest rate policy. Already the low kiwi is creating inflationary pressures through higher import prices. Greater export sales could compound this problem.

The kiwi might not stay down if the greenback falls on assumptions that the US Federal Reserve is near the end of the road with interest rate increases. A decline in the dollar may be further accelerated as the Bank of Japan lifts interest rates on the yen.

However, the kiwi will not automatically rebound on US dollar movements alone, because there are the domestic and international confidence issues to address, especially as government policies appear to undermine business and investment prospects. An offsetting factor that could lift the dollar despite low economic confidence could be the sheer volume of foreign earnings repatriated, although this effect would be dampened by adverse foreign investment flows.

The Reserve Bank will be forced to keep raising interest rates here for as long as the Federal Reserve does the same in the US but, if the Federal Reserve ends its interest rate hikes, it does not follow that the Reserve Bank can do the same while inflationary risk arises from a devalued kiwi.

Low share prices for export-exposed stocks may betray the belief that the end is not in sight for local interest rate increases, whatever the Americans might do in setting the international tempo with their own interest rates.

Higher interest rates make it harder for share dividends to be competitive as investment earnings and shares are ultimately priced from their dividend prospects. Additionally, companies face rising borrowing costs and therefore are likely to offer lower likely dividend payments. Reduced domestic demand as increasing interest rates affect consumers should not have much effect on listed export servicers, except where these firms also rely on imports for their revenues.

The low dollar, so favourable to exporters, might, ironically, be cheating sharemarket investors in the export-exposed sectors of their own piece of the action.

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