Interest rate rises reflect a 'buoyant economy'

Peter McIntyre
Peter McIntyre
Investors need not be afraid of interest rate rises expected this year, Craigs Investment Partners broker Peter McIntyre says.

Borrowing costs would increase for businesses and consumers, potentially impacting negatively on profit growth and discretionary spending.

''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 said.

Sectors such as materials, industrials and consumer discretionary spending had historically performed best during those periods because of their greater leverage to an improving economy.

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 Mark Adamson.

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.

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