Broker expects strong economic growth

Suzanne Kinnaird
Suzanne Kinnaird
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 Kinnaird said.

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 said.

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 prices.''

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 another.''

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 International.''

Health balance sheets and the positive economic backdrop should promote the next stage in capital markets, Ms Kinnaird said.

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, she said.

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.''

Stock picks

Air New Zealand: Upside to near-term earnings and competitive advantage through lower capital cost of new fleet.

A2 Corporation: Dairy-demand beneficiary, strong growth and potential merger and acquisition target, given its unique brand.

Contact Energy: Already pricing in a single-buyer electricity model.

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.

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