Investors need not be afraid of interest rate rises
expected this year, Craigs Investment Partners broker Peter
Borrowing costs would increase for businesses and consumers,
potentially impacting negatively on profit growth and
''But it should be noted the reason for these interest rate
increases is because of the strength of the domestic economy.
''Exports are strong, the housing market is robust,
employment prospects are improving and business optimism is
at its highest levels since 1994.''
Despite the pending increase in interest rates, the economy,
corporate sector and the sharemarket were all expected to
perform well as economic momentum improved, he said.
In the past 25 years, there were five occasions when
short-term interest rates had increased over a sustained
period. In every occasion, the market had produced a positive
return during the time those rate rises occurred.
''Quite simply, this is because rising interest rates are a
reflection of a buoyant economy.''
What did change when interest rates began to rise was the
performance of various sectors, Mr McIntyre said.
When interest rates were falling or staying low,
high-yielding, defensive sectors such as property and
utilities performed well.
When interest rates began to rise, the ''yield premium''
those sectors enjoyed started looking less attractive and
investor sentiment towards them became more cautious.
Growth stocks tended to perform well during those periods.
Because rising interest rates were reflective of improving
economic momentum, investors began to focus on those sectors
likely to benefit most from the improving environment, he
Sectors such as materials, industrials and consumer
discretionary spending had historically performed best during
those periods because of their greater leverage to an
Craigs expected a positive performance from the local market
this year, albeit with returns closer to 8%-10%, rather than
the 16.5% seen in 2013 of the 24.2% from 2012.
''We don't see the coming interest rate rises as a reason to
become cautious on New Zealand shares as these rises will
simply reflect our strengthening economy.
However, we do believe investors need to ensure they have a
healthy exposure to growth stocks while also retaining
high-quality defensives,'' Mr McIntyre said.
Five Growth Stocks
Fisher & Paykel Healthcare: The company's
high-value niche products enjoyed impressive positions in
various international medical device markets, facilitating
high levels of profitability and an impressive return on
investment. If the currency weakened this year, that would
enhance the investment proposition further.
Fletcher Building: Craigs expected the Christchurch
rebuild to pick up strongly this year and become a key driver
of the economy. Fletcher Building was a key beneficiary of
that, given its direct involvement in the rebuild through the
EQC process for residential claims of between $10,000 and
$100,000. Craigs had a positive view on new chief executive
Air New Zealand: Airlines were inherently risky due to
factors that could influence the outlook such as fuel prices
and currency movements. While that did not mean the sector
should be avoided completely, it did mean any investments
must be monitored closely and matched to the appropriate
investor risk tolerance. Despite those risks, Air NZ was an
excellent company with very strong medium-term prospects.
Mainfreight: During periods of economic growth,
transport, freight and logistics operators often felt the
benefit of increasing activity driving volume growth.
Mainfreight had a strong brand and market position in
Australasia but, in recent years, an increasing portion of
revenue and earnings had come from international operations,
including those in Europe and the United States. A recovery
in some of those regions, as well as any weakness in the
currency, would benefit the company.
The Warehouse Group: As the economy recovered, more
robust employment and potentially some long-awaited wage
growth was expected. As consumer confidence increased, the
retail sector should be a key beneficiary of increased
spending patterns and more disposable income. The group had
made some astute decisions in recent times, with the Noel
Leeming acquisition giving access to higher quality brands
and the ongoing move into online opportunities offering
another long-term growth avenue.