Wednesday 5th September 2018
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The latest round of New Zealand corporate earnings largely delivered as expected, with most companies reporting sales and profits within analysts' predictions.
The local stock market surged to a record in August despite few companies outperforming, and defying increasingly gloomy business confidence.
The bulk of 34 listed companies' earnings were posted between Aug. 8 and Aug. 29 in what broking firm First New Zealand Capital described as an earnings season that "delivered few surprises".
Research analysts Paul Turnbull and Arie Dekker said of the 15 reporting companies valued at more than $2 billion, just one - SkyCity Entertainment Group - reported pre-adjustment earnings that differed from FNZC's forecasts by more than 2 percent.
Weaker business confidence, which has been a political hot potato for months, didn't overshadow earnings, although a number of companies noted a weaker outlook. Confidence surveys also gauge firms' measure of their own activity, something that tracks more closely to economic growth than business sentiment, and has also been deteriorating in recent months.
FNZC's analysts said the more cautious tone in management outlook came from cyclical stocks, which typically track the ups and downs of the wider economy.
Air New Zealand’s underlying earnings guidance weakened as jet fuel prices continue to increase, while Fletcher Building expects land development earnings to drop in the year ahead as residential construction softens in New Zealand and Australia. Courier and information management company Freightways is targeting earnings growth in 2019, but is cautious due to weaker business confidence.
Mark Lister, head of private wealth research at Craigs Investment Partners, said there were a number of reasons why weaker business confidence didn't drag earnings lower.
The divergence between earnings and confidence was partly due to the type of companies which are members of the sharemarket - big businesses - while small businesses, which make up the majority of respondents to confidence surveys, are "probably feeling more apprehensive," he said.
"Small business doesn’t have the same ability to weather the storm, if we do see a storm, as big business," Lister said. "Industrial relations and changes to the tax landscape is probably quite concerning for a lot of small businesses, whereas bigger businesses will be able to shoulder any of those changes more easily."
Despite the lack of surprises, good or bad, in earnings, the local benchmark index hit a record high on Aug. 29 - a day after trading was disrupted by a major outage - and soared 4.4 percent in the month, its best monthly performance in two years.
That strength came from international tailwinds: the US markets had a strong month, with the Dow Jones Industrial Average and Standard & Poor's 500 each marking their best August since 2014. But local factors, particularly the 'lower for longer' track interest rates are on, also played a part.
Traders are now pricing in a 50 percent chance the Reserve Bank will cut the official cash rate in an effort to lift inflation, and Lister said part of the appetite for shares could be that softer economic outlook and lower return from other investments such as term deposits.
"That plays right into the hands of some of those high dividend paying companies like the electricity companies, the listed property companies, Vector, Chorus, all of those," he said. "The sharemarket still looks attractive to people looking for income, especially when you’ve got the Reserve Bank that is talking now about cuts. That gives people looking for any sort of yield confidence that they're not going to get much sitting in the bank.
"A lot of investors still have limited other options," Lister said. "Property is not flying ahead like it has in years gone by, you’ve got regulatory change and policy change that’s making investment in real estate a bit more difficult – the sharemarket maybe is picking up a bit of interest."
A weaker New Zealand dollar also bolstered sharemarket interest as many of the major listed entities are exporters or operate overseas. The kiwi was trading mostly between 72 and 73 US cents for the first four months of the year but has dropped back since April, recently trading at 65.48 US cents. It also makes it cheaper for foreign investors.
"We have lots of exporters on our sharemarket – Fisher & Paykel Healthcare, Mainfreight, Restaurant Brands, Vista, Pushpay, A2," Lister said. "All of these businesses have substantial offshore operations, so one: they’re not as concerned about what’s happening on the ground in New Zealand. Two, the softer economic outlook and likely lower interest rates has pushed the New Zealand dollar down, and if you’re an exporter that’s great, that’s the best news you could get."
After August's big gains, there's potential weakness on the horizon for local stocks. The 'September Slump' has historically hit US markets, with an average 1 percent slump for the S&P 500.
Lister said that weakness could play out, with no shortage of concerns in the US including ongoing trade tensions with China, mid-term elections coming up, and anticipated further interest rate hikes in the US. Locally, the first interim report from the tax working group is due this month and could spook the market.
"There could well be a bit of a stumble in the next couple of months, particularly with markets having performed quite well in July and August," Lister said. "If the tax working group comes out and says ‘we’re going to put a capital gains tax on everything’, maybe that’s another thing for local investors to get a bit nervous about. There’s any number of factors which could cause things to come off the boil, but there’s a lot of supporting factors as well."
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