Economic activity provides a positive backdrop for
equities, as economic growth this year (2014) is set to be very
robust, Forsyth Barr broker Suzanne Kinnaird says.
Nominal gross domestic product (GDP) growth was now forecast
to be closer to 5% over the next several years, in contrast
to the 3.8% averaged over the past three years.
''Despite this positive backdrop, analysts currently do not
forecast any uplift in earnings growth relative to the last
three years. This suggests we should expect analyst upgrades
over the coming 12 months.
''On top of this, improving conditions should provide greater
confidence and prompt businesses to invest,'' she said.
Cyclical stocks had the largest leverage to the current
theme. Air New Zealand, Mainfreight, Opus International and
Skellerup were Forsyth Barr's preferred cyclical exposures.
Politics and business ''unfortunately'' interacted and the
reality was that in 2014, New Zealand had a general election.
Current polling indicated the outcome was a coin toss, Ms
The lead-in positioning had already begun and the political
rhetoric had raised perceptions of political and regulatory
risk for some companies and sectors.
Successfully separating the posturing from potential
implementation created opportunities as the market priced in
the uncertainty the potentially binary outcome produced, she
SkyCity's convention centre, building-product prices,
subsidised film studios, deepwater oil drilling and, more
lately, Chorus were being portrayed as corporate favouritism
and the overruling of independent regulators or public
wishes. However, most of the issues would be dealt with
before the election, she said.
The electricity sector and asset sales had been set up as
policy platforms by both Labour and the Greens. The electoral
referendum provided additional focus and the issue looked
difficult to address and was set to run all the way to the
election, Ms Kinnaird said.
''The market appears to have already priced in the
introduction of a single-buyer model. This means while we
won't know the final outcome until well into next year,
down-side risks are already factored into these share
Contact Energy was Forsyth Barr's preferred way of gaining
exposure to the sector.
Outside of that, the introduction of capital gains taxes and
more progressive tax rates held less trepidation, she said.
Domestic conditions remained difficult in Australia, as seen
by the accommodative monetary policy stance expected to be
maintained by the Reserve Bank of Australia.
The 2014 outlook for Australia was likely to be driven by
rising unemployment as companies repaired their lack of
competitiveness and responded to the slowest nominal income
growth since 1991-92, outside of the global financial crisis.
Housing might continue to be supported by low interest rates
but activity would be contained by potentially lower
first-home buyer activity. Slow income growth would pressure
consumer spending and there was little evidence of any
sustained acceleration, Ms Kinnaird said.
''The outlook will provide a headwind for New Zealand
companies with Australian operations that cannot grow market
share. We believe Mainfreight is one stock that is gaining
market share and provides upside. A2 Corporation is
Dairy had a direct contribution to the New Zealand economy
but the flow-on impacts were significantly larger, she said.
Strong dairy auction prices were starting to flag additional
upside risk to farm-gate milk prices.
ANZ Bank cited potential increases from the current $8.30 per
kg/ms price forecast but even at that level, Forsyth Barr
calculated that was a $4.5 billion boost to dairy incomes and
potential spending relative to last season.
Demand for proteins continued to be strong from China, while
the proposed changes to the one-child policy provided an
additional boost, Ms Kinnaird said.
A2 and Skellerup provided good exposure to the dairy sector.
The Christchurch rebuild was accelerating and providing a
base for building activity. Auckland residential supply
shortages added up to building activity and should accelerate
now the Auckland Council had freed up development land.
Forsyth Barr expected another boost to sentiment as
redevelopment of the Christchurch city centre gained
momentum, but noted the building-sector stocks already
incorporated the uplift in activity.
''Given the sector is a large employer, we believe the better
opportunity may be the flow-on impacts of the employment
uplift, which will benefit recovery in other cyclical
sectors. One stock that still looks undervalued and has an
excellent exposure to the Christchurch rebuild is Opus
Health balance sheets and the positive economic backdrop
should promote the next stage in capital markets, Ms Kinnaird
Last year was a significant year of new issuances, and in the
latter part of the year, acquisitive companies began to
utilise capital markets.
Cost cutting and share buy-backs had been the norm but as
boards became more positive, businesses were expected to
progressively pursue growth options.
Whether that was by investment or acquisition, merger and
acquisition activity was expected to accelerate this year,
That should bolster earnings growth and again point to
favouring growth stocks.
''Picking targets is more problematic, so we would only list
those with desirable or unique brands. Of our top picks for
2014, we believe A2 Corporation is the best fit.''
Air New Zealand: Upside to near-term earnings and
competitive advantage through lower capital cost of new
A2 Corporation: Dairy-demand beneficiary, strong
growth and potential merger and acquisition target, given its
Contact Energy: Already pricing in a single-buyer
Mainfreight: Cyclical and structural growth as
Australia recovers and domestic operations improve.
Opus International: Beneficiary of New Zealand
construction activity as well as improving expectations for
its global operations.
Skellerup: Upside to industrial products growth had
been deferred to 2014. Exposure to the favourable outlook of
the dairy sector adds another positive factor.
Sky TV: Competitive and regulatory risks are
overstated, while growing free cash flows are not reflected
in the share price.