Low-growth expectations could help NZ equities surprise on the upside as the latest corporate reporting season rolls on, according to Harbour Asset Management portfolio manager, Shane Solly.
Solly said NZ companies have a lower bar to jump in this reporting round with consensus earnings growth forecasts of 2-3 per cent set under the long-term average.
“NZ market wide earnings growth expectations are below average so if companies deliver better than expected then this could support the market,” he said.
The NZX entered the new decade on a record high following a stellar 2019 that saw the index return over 30 per cent.
However, the current sky-high valuations – the NZX is sitting on a price-to-earnings ratio of 26.6-times compared to the 19.8-times five-year historical average – could stymie returns in 2020 if corporate results come back to earth.
“A worse-than-expected NZ market earnings season could be the trigger for some profit-taking,” Solly said.
He said investors are cautiously optimistic after retirement village operator, Oceania Healthcare, kicked off the first 2020 reporting season with a solid result. During the week the Australian Macquarie group sold down its cornerstone 41 per cent stake in Oceania for about $300 million in an institutional book-build. International demand for NZ stocks was also highlighted last week as Australian real estate investor Centuria launched a bid for NZ listed property firm, Augusta Capital.
But risks abound as larger NZX firms line up to report, Solly said, fueled largely by global events such as the US-China trade talks, the Australian bushfire catastrophe and growing concerns about a potential coronavirus pandemic.
Investors will be looking out for evidence of both global and local risks impacting NZ corporates as reports flow in, he said.
“At the margin company outlook statements may remain cautious reflecting global uncertainties and the pending election cycle in NZ and the US,” Solly said.
“Overlaying near term cyclical impacts, companies continue to face structural changes and opportunities including the rise of sustainability as an economic force.”
Rising local employment costs, underpinned by a tight labour supply, could show up in lower NZ company profits, Solly said, although ongoing super-low interest rates may offset wage pressures.
Likewise, soft monetary conditions across the world may sustain global share markets in spite of niggling concerns.
“Coronavirus pandemic concerns may have triggered a pull-back in global equity markets. Global markets may have been vulnerable to a correction because they exhibited early signs of exuberance, as reflected in strong price momentum, investors aggressively switching into equities, and valuations in parts of the market getting extended,” Solly said.
“But there is a modest upturn in global manufacturing, and central banks are maintaining an easy bias in monetary policy, which in combination provides some support for equity returns.”
Overall, he said Harbour sees a positive but imbalanced global business cycle to roll on.
The S&P/NZX50 was up more than 0.4 per cent on Friday and almost 2 per cent over January.
However, S&P noted at month-end: “Investable companies in the primary sector and small-caps struggled in New Zealand, with the S&P/NZX Primary Sector Investable Equity and S&P/NZX SmallCap declining 1.5% and 0.3%, respectively.”