NZX 50 outperforms Australian, European indices in Q3

Wednesday 1st October 2014

The NZX 50 Index outperformed its Australian, European and UK counterparts in the past quarter, pushed higher by confidence after August's reporting season and a rally in listed electricity generator-retailers based on political relief, which boosted the index to record levels.

The benchmark index gained 2.2 percent in the three months ended Sept. 30, in contrast to and outperforming Australia's S&P/ASX 200 Index's drop of 1.9 percent, Germany's DAX Index which declined 3.6 percent and the UK's FTSE Index which fell 1.8 percent in the same period. In the three months the NZX 50 rose to a record close of 5277.861 points, reflecting an 11 percent gain from the start of the year.

Compared to American stocks, the NZX50 also rose further than the Dow Jones Index, which was up 1.3 percent over the three months, but couldn't match the tech-heavy Nasdaq Index's 5.2 percent quarterly rise.

In August, New Zealand companies with a June balance date reported full year earnings in line with or slightly above guidance, while their outlooks were largely optimistic about the coming year, Rickey Ward, NZ equity manager at JB Were told BusinessDesk.

"Over the last quarter you had the reporting season which provided an indication for further positive momentum to continue," Ward said. "There is an element of optimism out there about earnings being able to grow, albeit at a lesser rate than what they have but they're still growing on a bigger base and more importantly sales are growing."

That is in contrast to Australia, where concern is growing about the future of its economy as the mining boom winds down, while the price of iron ore, its largest export, has fallen 42 percent this year. Further afield, weakness in the European economy has seen its central bank mull possible stimulatory measures to revive its stagnating economy, Ward said.

Over the quarter, the NZX Energy Index, which includes all the NZX 50 gentailers as well as the likes of Z Energy and minnow NZ Windfarms, advanced some 14 percent as support grew for the incumbent National-led administration in the lead up to the Sept. 20 general election, and the subsequent win giving Prime Minister John Key and his National party government a third term. That's a turnaround from last year when polling was showing a pick-up for the opposition parties, which had pledged to introduce a single wholesale electricity buyer in a bid to push down retail prices. The NZX Energy Index dropped 9.6 percent over 2013, compared to the benchmark's 17 percent rally.

Shares of the state-controlled gentailers, which were partially privatised over the past 18 months, were the biggest gainers and rose to records. Meridian Energy jumped 18 percent this quarter, paced by MightyRiverPower, which climbed 15 percent, and Genesis Energy advanced 12 percent. Contact Energy rose 13 percent, while TrustPower increased 2.2 percent in the quarter.

"Obviously the electricity companies have been the strongest performers," said Mark Lister, head of private wealth research at Craigs Investment Partners. "I certainly wouldn't say they've had their run. I think they will continue to do well.

"All that we've seen over the last few months is them getting back to where they deserve to be in the first place. They're certainly not hitting levels where you'd say 'oh that's expensive we're not interested in that one'."

Conversely, Xero, the cloud-based accounting software firm, dropped 16 percent over the three month period to be one of the worst performers in the quarter. Investors have questioned the company's growth plans in the US with Deutsche Craig initiating coverage on the company as a 'sell' and giving the stock a price target of $18.90, compared with a share price of $21.49 today. In September, its US chief executive Peter Karpas left after just six months with the company.

Looking ahead, both Ward and Lister expected the local bourse to maintain its gains, although there was caution in global markets on what impact the US Federal Reserve winding down its bond buying programme at the end of this month might have.

Ward said local companies had a policy of paying shareholders a high proportion of profits, adding support to the share prices, and may even further boost dividends, to keep stocks as an attractive investment option in an environment of rising interest rates.

"When you have that as a general policy it’s hard to see how you get material declines, short of any global catastrophe," said Ward.

BusinessDesk.co.nz

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