If 2013 was characterised by large floats and big
Xero-shaped surprises, brokers are saying 2014 is shaping up
as a choppy year of political uncertainty and interest rate
hikes Peter Smith.
The year 2014 is the Chinese year of the Horse, beginning
on January 31, 2014. Legend has it that in ancient times,
Buddha asked all the animals to meet him on Chinese New Year.
Twelve came, and Buddha named a year after each one. He
announced that the people born in each animal's year would have
some of that animal's personality. Those born in horse years
are cheerful, skilful with money, perceptive, witty, talented
and good with their hands.
At Chinese New Year celebrations people wear red clothes,
decorate with poems on red paper, and give children ''lucky
money'' in red envelopes. Red symbolises fire, which
according to legend can drive away bad luck. The fireworks
that shower the festivities are rooted in a similar ancient
custom. Long ago, people in China lit bamboo stalks,
believing the crackling flames would frighten evil spirits.
In looking back over the past year, I noted that in my
end-of-year summary in December 2012 I predicted ''the place
to be in 2013 is still the NZ sharemarket. Dividends will be
important. Any growth will be a bonus. Many companies and the
listed property companies are expected to continue to produce
yields above bank deposits and many corporates will continue
to issue bonds with yields around 6%-7% gross''.
Nothing has changed, but look out 2014. As commentators
endorse below, do not expect double-figure returns to
continue into 2014 but it is most likely markets will be back
to the more normal long-term trends of about 4%-5% after tax.
I do not expect any major market corrections, but rather
minor ups and downs within a small range. However, there
shocks can always upset the applecart.
The NZ market has had a very good 12 months, with an average
19% gain. The average return on NZ share funds was about 25%
for the year. As many of you are aware, there have been some
very good results from individual companies such as Ryman,
Fletchers, Auckland Airport and Xero. The Government
sell-offs of Mighty River Power and Meridian have not gone
well in the short term, with the prices reducing below list
price. Much of this is politically driven, by negative
politics. Long-term holders of these shares should see
capital gains eventually. Genesis is next. Many clients asked
about Air NZ but it was placed with institutions and there
was no public pool.
Chorus could bounce back after a bad 2013. Photo supplied.
The big driver of markets in 2014 will be the extent of
''tapering'' by the US Federal Reserve. As you are aware, up to
$US85 billion ($NZ104 billion) a month has been injected into
the US market over the past five years. Tapering this down to
an acceptable level and at what rate will be the key.
Federal Reserve chairman Ben Bernanke is to retire as at
January 31. He has just announced, as his swansong, a cut in
the qualitative easing of $US10 billion a month. Markets at
first were concerned but have stabilised, realising much has
already been built into market prices over the past year. So
it is business as usual, with US equities again at all-time
highs. Economist and current Fed vice-president Janet Yellen
has been recommended as Bernanke's replacement. Markets
continue to be happy about this as they perceive no major
changes in policy with her appointment.
The NZ Official Cash Rate (OCR) has stayed at 2.5% all year
but the Reserve Bank has more than strongly signalled it will
rise in 2014. Among all the issues the RBNZ has to weigh up
there is one overarching reality: inflation seems likely to
be around the midpoint of the policy band by mid-2014. So the
prospects suggest a series of hikes in the early part of the
year. The bets are now on with the economists as to whether
the first rise will be January 2014 or March 2014. Also, will
it be a 0.25% or a 0.5% rise? Already three of the main banks
have raised their fixed rate mortgages in anticipation of the
increased cost of financing mortgages in 2014.
Harbour Asset Management managing director Andrew Bascand
said in early December that investors should expect more
normal returns on equities after a racey 2013. Equity prices
rose 19% and were 103% up on the low point in February 2009.
November 26 had been a record trading day for the NZX in both
volume and value, as $926.8 million shares changed hand.
''I don't want to dampen people's spirits; I don't want to
jump on people's hopes of grabbing these returns. But I would
say that our equity market here, one shouldn't expect it to
race ahead here again.''
That said, Mr Bascand believed 2014 would still be a busy
year, with a lot of new listings expected. He said the
domestic technology sector was highly sought-after and there
were many strong export businesses in New Zealand. Harbour
sees the 2014 government elections looming as a significant
risk for investors. Possible changes to the electricity
market, company tax rates and a capital gains tax were all
risks which needed to be priced into the market.
Expectations of the NZ economy for 2014 are high,
particularly as the hiccup by Fonterra has not affected it
greatly and the record payout of $8.30 per kilo of milk
solids will boost the agricultural sector and reduce debt on
many farms. Dairy prices are 46% higher than a year ago
(despite lower volume due to the drought) and prices for
wool, sheep meat, wine and forestry are also higher. Tourism
is up and as we know, Dunedin is having a record number of
cruise ship visits.
News the Government has granted 10 licences for oil and gas
exploration is a reminder the energy sector remains a
significant prospect for economic growth. Taranaki is firing
on all cylinders.
The mild winter is underpinning a sharp turnaround in
agricultural production and a recent survey of manufacturing
showed signs of reasonably upbeat manufacturing sentiment
flowing through into economic activity. Construction work
undershot the consensus pick, but more encouraging were signs
that residential building work is stepping up, particularly
in Auckland and Christchurch.
While the weakness in building work was concentrated in the
non-residential sector outside Canterbury, strong cement
production and significant upward historical revisions to
construction work since 2012 suggest a firmer starting point
for construction sector activity. This would be more
consistent with the elevated pricing signals coming from the
construction sector, despite signs the high-LVR speed limits
on housing lending are starting to achieve a reasonable
degree of traction.
If 2013 was characterised by large floats and big Xero-shaped
surprises, brokers are saying 2014 is shaping up as a choppy
year of political uncertainty and interest rate hikes. The
general election next year is the most obvious cloud on the
horizon, with the likelihood of a close race making the
outcome uncertain. Rob Bode, head of research at First NZ
Capital, says the result could be significant for the
electricity and telecommunication sectors.
''Together with the reasonably sharp divergence in policies
between a National-led or a Labour-Green coalition, it
suggests that the political risk premium for domestic
equities may increase,'' Mr Bode says. Of all the brokers
spoken to this time last year, none picked Xero, the
accounting software company that has gone from a mid-sized
start up to NZX titan during the past 12 months.
I would expect Chorus will not be on many lists, nor
Fonterra, given the reduction in dividend forecast by both.
However, in my opinion Chorus, despite political uncertainty,
could be a winner in 2014.
In summary, the NZ economy will be vibrant in 2014, with some
political uncertainty due to the end-of-year general
election. The NZ market will perform satisfactorily and the
expected interest rate rises will not be that dramatic. I
expect the OCR to be around 3.5%-4% by year-end 2014. The
place to be, with a slight overweight in asset allocation, is
international equities. However, as readers well know, all
portfolios need a balance of all asset classes.
- Peter Smith is an authorised financial adviser and a
certified financial planner and is the principal of Kepler
Group Otago Limited. Email: pete@ keplergroup.co.nz. A free
disclosure statement is available on request.