New Zealand Stocks Can’t Quite Break the $100 Billion Level

(Bloomberg) -- A rally that’s taken New Zealand equities close to commanding $100 billion in market value for the first time is facing one of its biggest tests: the country’s weakening economic outlook.

A stellar 27% surge this year took the New Zealand Exchange 50 Gross Index to a record high on Sept. 6, even as economic indicators stoked concerns about growth. The equity measure slid 2.6% in the following three days as yet another report signaled that the economy is weakening. The gauge rose 0.2% to 10,949.10 as of 8 a.m. in Singapore on Thursday.

The signals began last month with a report showing manufacturing contracted for the first time in nearly seven years in July. Meanwhile, annual earnings estimates for the benchmark index have turned lower and the iShares MSCI New Zealand ETF has seen outflows almost every day, according to data compiled by Bloomberg.

Domestic cyclical companies, some growth stocks and even defensive yield plays have seen downgrades to earnings expectations since the July factory report, said Craig Stent, an equities fund manager at Harbour Asset Management Ltd. in Wellington. A large component of the listed market comprises locally focused companies that may be hurt by a potential economic slowdown, he added.

The nation’s shares first approached the $100 billion milestone in July. That attempt faded amid strength in the U.S. dollar after the Federal Reserve clarified that New York President John Williams’ dovish comments at the time weren’t about potential policy easing.

New Zealand’s factory performance report for August, due on Sept. 13, may pose the next challenge to the stock index’s fortunes, while the quarterly economic growth release on Sept. 19 and the central bank’s interest rate decision on Sept. 25 may prove to be its litmus tests.

“The trend remains lower for New Zealand PMI, and it ought to be expected to continue to trend lower for as long as the global business cycle demonstrates signs that it’s coming toward an end,” said Kyle Rodda, an analyst at IG Markets Ltd. in Melbourne.

Nikko Asset Management NZ Ltd., which oversees NZ$6.2 billion ($3.98 billion) in assets, is more concerned about the effect of rising salaries than some economists’ predictions that growth will slow to about 2% this year. The firm has maintained its holdings, particularly in stocks that are less influenced by economic swings and those with valuations that don’t reflect their earnings outlook.

“What worries me more than lead indicators for growth is wage inflation based on minimum wage increases that have occurred and are still to come,” said Stuart Williams, who oversees about NZ$1.02 billion in mostly New Zealand stocks as head of equities at Nikko Asset Management NZ. “The resulting pay reality claims are really just starting and will continue, challenging many businesses to pass on these increases,” he added.

Still, New Zealand Finance Minister Grant Robertson in a Bloomberg Television interview on Sept. 3. said that the country’s slowing economy will probably respond to policy makers’ efforts to rekindle growth.

Any stimulus may be too little, too late to revive earnings in the immediate future, said Tina Teng, an analyst at CMC Markets Plc in Auckland.

“Business investment intentions and profit expectations are worsening,” Teng said. “All of the above factors will drive down NZ stocks’ earnings overall.”

To contact the reporter on this story: Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Margo Towie, Kurt Schussler

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