Kiwi’s ‘defensive’ equity market underperforms its global peers in 2021
It would be easy to hammer home the Kiwi stock market for not performing as well this year as overseas markets, but investors say a look under the hood shows some local quirks have been at play.
By mid-December, it was clear that the local market had underperformed, falling by around 2% compared to an increase of around 20% for global markets.
“That’s a pretty blatant 22% underperformance,” said Sam Dickie, Fisher Funds senior portfolio manager for New Zealand equities.
However, Dickie notes that the New Zealand market saw strong growth in the five to six years leading up to the Covid-19 pandemic, outperforming global stocks by 50-60%.
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The makeup of the local market is also a factor, with a high proportion of defensive stocks which, due to their bond qualities, are hammered when interest rate expectations start to rise.
This is the case this year, with the yield on 10-year New Zealand government bonds falling from around 2.5% to around 1% at the start of the year after pharmaceutical companies successfully developed vaccines against the pandemic.
“We know that as interest rates rise, bond prices fall. And as interest rates rise, bond proxies such as utilities and real estate fall, ”Dickie said, noting that the New Zealand market has about five times as many defensive stocks as the US. United.
The big beneficiaries have been cyclical stocks like oil companies, industrial commodities companies and global industrial companies.
“These companies have been in high demand,” says Dickie. “We just don’t have a lot. We have a lot of defense.
New Zealand stocks that benefit from reopening economies after lockdowns went smoothly, like global cinema software company Vista and transportation and logistics company Mainfreight, but the local market doesn’t have many. , he said.
Then, as often happens, there was an idiosyncratic factor that can influence our relatively small market.
As this year approaches, Meridian Energy and Contact Energy, two large retail power producers known as ‘gentailers’, have skyrocketed in no time as they were awkwardly included in a global index. of US renewables, which has caused an increase in demand for their relatively illiquid stocks.
The unwinding of that impact has been a big drag on the market this year, says Dickie.
The best performing sector this year has been materials, which is up about 45 percent. The main component is Steel & Tube, which manufactures and distributes steel products.
Dickie says Steel & Tube is benefiting from strong demand for steel as economies reopen, which has pushed up steel prices and margins.
The energy sector was the second best performer, up around 20 percent, after Z Energy’s share price jumped following a takeover offer from Australian fuel retailer Ampol.
The consumer discretionary sector was the third best performer, up around 12% as retailers such as Kathmandu, The Warehouse Group and Briscoe Group took advantage of pent-up demand as people spent their money locally instead of travel abroad during the pandemic.
“There was tremendous demand for consumer discretionary around the world and we certainly saw it in New Zealand, too,” Dickie said.
Yet not all shares in the industry have paid off, with companies like SkyCity Entertainment Group hit by closures and lack of foreign tourists.
The industrial sector was the second best performer, up around 10% as companies like Mainfreight, Freightways and Fletcher Building benefited from the economic reopening while the Port of Tauranga and Auckland International Airport continued. to be affected by blockages, travel restrictions and freight. congestion.
Dickie says the worst performing sector was the consumer staples sector, which fell 40%, while The a2 Milk Company fell 50% and Synlait Milk fell 35% as their businesses were affected by a downturn. too much supply and insufficient demand for their products, which has been exacerbated by the disruption of the daigou sales channel due to the pandemic.
The other big underperformance was the utilities sector, which was hit by gentailers who suffered the double whammy of the heat of the year as well as rising bond yields.
Dickie says companies with the right culture perform better because they retain staff and face less wage inflation in an environment of labor shortages. Examples include cloud-based accounting company Kiwi Xero, which is listed on ASX, and transportation and logistics company Mainfreight.
“These guys have been focusing on culture and caring for their people for decades and it’s coming home more than ever right now,” he says.
Another big lesson to be learned this year as inflation accelerates is the importance of pricing power, the ability to raise prices at least at the rate of inflation without losing customers to competitors. .
Examples include Xero, which has a product that customers love and customers need, and is now able to pass on cost pressures after freezing prices during Covid to take care of its customers.
Another with strong pricing power is retirement village operator Summerset, which has looked after its customers well during the lockdown and is experiencing exceptional demand for its villages, Dickie said.