MARKET CLOSE: NZ shares advance after RBA inflation forecast lures investors to equities

Friday 6th May 2016

New Zealand shares rose, reversing an earlier decline, after the Reserve Bank of Australia downgraded its forecasts for inflation, suggesting interest rates may head lower and prompting investors to seek out higher returns from equity investments.

The S&P/NZX 50 Index gained 21.630 points, or 0.315 percent, to 6,898.110. Within the index, 31 stocks rose, nine fell and 10 were unchanged. Turnover was $177 million.

The Reserve Bank of Australia this week cut its benchmark interest rate by 25 basis points to a record low 1.75 percent and in its quarterly monetary policy statement today the bank said it now expected underlying inflation to be at just 1 to 2 percent this year, below its medium term target of 2 to 3 percent, prompting speculation interest rates could fall further and sending investors in search of higher yielding assets such as equities.

"The Reserve Bank of Australia came out with some inflation projections that were a little lower than the market had expected for the period ahead and is starting to point to perhaps a further easing by the RBA," said Matthew Goodson, who helps manage more than $1.6 billion of equities in New Zealand and Australia at Salt Funds Management. "People are finding it extremely hard to get a yield anywhere and it's forcing people into equities. Low inflation normally means less earnings growth, but investors are ignoring that and just trying to find a yield, any yield, and hence flocking into the equity market."

Goodson said many New Zealand stocks are in Australian indices and therefore part of the "investable universe" for Australian fund mangers, which tended to boost larger stocks on the kiwi market..

"It just naturally tends to feed over," he said..

Spark, New Zealand's largest listed telecommunications company, advanced 1.4 percent to $3.70.

Electricity stocks also gained. Meridian Energy increased 1.7 percent to $2.675, Genesis Energy rose 1.4 percent to $2.13, Contact Energy lifted 1.2 percent to $5.15, while Mighty River Power edged up 1 percent to $3.04.

Retirement villages advanced, benefiting from First NZ Capital's upbeat report on the outlook for Metlifecare this week and continued strength in the property market, he said.

"The data over the last few weeks of yet further expansion in the Auckland house price bubble and the spreading of the horrendous bubble to the rest of the country is powering those stocks for now," Goodson said.

Metlifecare rose 2.2 percent to $5.62, Ryman Healthcare gained 0.9 percent to $9.07, while Summerset Group Holdings increased 1.6 percent to $4.43.

Z Energy advanced 2.6 percent to a new record close of $8.18 after it last week gained Commerce Commission approval to buy the rival Caltex and Challenge! petrol station chains.

"Given the positioning of the company and their control of all the vertical infrastructure through terminals, pipelines, and tankage etc, it makes it very difficult for any potential competitors so I think the market is taking the view that those earnings streams are going to be very hard to affect and should therefore deserve a higher multiple," Goodson said.

Sky Network Television was the biggest decliner on the benchmark. Its shares sank 16 percent to $4.63 after the pay-TV operator said subscriber numbers are expected to fall further this financial year, causing earnings next year to miss analyst estimates.

"Sky does have some challenges at the moment as the subscriber base fragments and they are starting to lose subscribers particularly for the higher value packages," Goodson said. "I would certainly expect downgrades through the market following this very disappointing subscriber update today."

Air NZ slid 3.5 percent to $2.36 after oil prices rose overnight and investors mulled the national carrier's plan to divest its quarter stake in Virgin Australia. Air NZ is said to have flagged at an investor presentation day this week that it would like the sales process to be completed by June 30, although Centre for Aviation analyst Blake Moore said its plan may be delayed by a looming Australian election.

BusinessDesk.co.nz

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