NZ stock market slide attributed to two factors

THE reporting season has produced a betterthanexpected set of results from many companies, yet the NZX50 index has continued to slide.

The index is hovering around correction territory — classified as a 10% fall — while other markets around the world remain strong.

Stephen Bennie, of Castle Point Funds, said there were two parts to the story when it came to the index fall.

One was stockspecific declines, while the other was the overall theme of inflation, making New Zealand’s dividend yieldheavy market appear much less attractive to overseas investors, Mr Bennie said.

About 2.5 percentage points of the index fall was attributable to the energy companies — Meridian, Contact, Mercury and Genesis — which make up a large part of the index.

‘‘Meridian is down 20%, Contact 14% and Mercury and Genesis both 10%. That is a lot for the index to cope with.’’

The reason for the falls was global clean energy exchangetraded funds, which had been strong buyers of Mercury and Contact shares in the past month, had been selling more recently.

Outside the energy companies, Fisher & Paykel Healthcare had also weighed the index down. After a strong run last year, buoyed by huge demand for its products through the Covid outbreak, the stock had fallen of late as vaccine rollouts pointed to what was hopefully the beginning of the end of the pandemic.

Auckland International Airport’s result last week had also put a downer on the index, Mr Bennie said.

‘‘Reporting season has been pretty good for most companies, apart from the tourism companies.’’

Investors had been disappointed by the fact a transtasman bubble no longer seemed likely to happen in the first half of this year, Mr Bennie said.

The second major issue hanging over the New Zealand sharemarket was the expectation of rising inflation, thanks to the huge amount of stimulus that had been pumped into economies around the world.

Last year low interest rates resulted in overseas investors piling into New Zealand companies which paid high dividends.

Overseas investors typically owned about 25%35% of New Zealand shares, but that had risen to more than 50%, Mr Bennie said.

But now some experts were pointing to inflation ahead, and New Zealand’s dividendpaying shares were looking comparatively less attractive.

‘‘The market is having a bit of a pivot.’’

That meant the New Zealand market’s tailwind had effectively gone, leaving it becalmed.

‘‘We have been left a bit high and dry.’’

Whether the slump would continue was hard to predict.

There had been similar scenarios before over the past 30 years, where economists predicted high inflation but it had never eventuated.

‘‘But there is certainly renewed expectation.’’

Fisher Funds New Zealand equities manager Sam Dickie said the market was highly focused on nascent inflation.

‘‘The market is pricing in inflation expectations for the next five years at the highest level since 2013. Five minutes ago it feels like we were in a deflationary recession and now we are pricing inflation at the highest in eight years.’’

The rise in interest rates ‘‘means our market is underperforming sharply’’, Mr Dickie said.

That meant Fisher Funds was looking for companies with pricing power — the ability to lift prices in line with or more than inflation, to maintain or improve their margins.

Xero was a good example of that, he said.

‘‘If you look at the last three or four years globally, they have increased their prices by around three times as much as local inflation.’’

Another one was Vista Group, which had CPI increases built into many of its contracts.

‘‘It is those sort of companies we are looking for in this environment.’’

Staying away from the dividendheavy New Zealand market was also a way to protect against inflation, he said. — The New Zealand Herald

❛ Reporting season has been pretty good for most

companies, apart from the tourism companies