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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.
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.
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.