NZ stocks confound strategists in 2009 with rally led by fast food, kids' clothes

Thursday 24th December 2009

New Zealand’s stock market confounded investment strategists in 2009, a year that began with a retreat toward anything defensive and ended with a halfway decent rally led by fast-food operator Restaurant Brands and children’s clothing chain Pumpkin Patch.

The benchmark NZX 50 index climbed 16% so far this year, clawing back about half of 2008’s 35% plunge, the worst performance since 1990. So called defensive stocks including power company Contact Energy ended up among the year’s laggards. Equity markets worldwide recovered as policy-makers and central banks took drastic action to protect the global economy and restore confidence in financial markets.

“The really good conservatively run companies by the end of the year were not the best performers” as investors were more confident to take risks, said Stephen Walker, head of asset management at Goldman Sachs JBWere. New Zealand shares “have shown and delivered a pretty credible performance over the last year or so,” he said. “People don’t appreciate how good returns have been in this calendar year.”

By September, investors had confirmation the worst was behind them, with government figures showing the economy emerged from recession in the second quarter, eking out growth that was revised up to 0.2% this month and was followed by a same-sized expansion in the third quarter.

Reserve Bank Governor Alan Bollard has signalled an end to the easiest monetary conditions since the official cash rate was introduced in 1990, with an increase in the OCR officially slated for mid-2010.

Heading into 2009, companies faced the prospect of the worst global recession since World War II as the collapse of the financial sector in the U.S., which claimed the scalp of investment bank Lehman Brothers, forced the likes of Merrill Lynch and Bear Stearns to be sold at fire-sale prices, and raised the prospect that the global economy’s recession would give way to full-blown depression. Investors and fund managers were cautious at the end of 2008, pulling their money out of higher-yielding, or riskier, assets, in favour of government bonds and safe haven currencies such as the yen and U.S. dollar.

“At that stage, things were pretty dire,” said Craig Brown, who helps manage $3.3 billion at ING New Zealand. “To be honest, I’m not sure we could’ve picked it,” he said, of the subsequent recovery.

The world’s biggest central banks took extraordinary measures including near-zero interest rates and quantitative easing to shore up confidence in financial markets and thaw credit markets.

The Chicago Options Exchange Board’s Volatility Index, which measures the cost of insuring puts on the Standard & Poor’s 500 and is commonly known as Wall Street’s ‘fear gauge’, halved to 21.68 from the start of the year, as investors regained confidence to increase their exposure to riskier assets.

Restaurant Brands, the franchise holder for Pizza Hut, KFC and Starbucks in New Zealand, led the NZX50, soaring 175% to $1.68 in the past 12 months after it continued to grow its KFC business while restoring sales growth for pizza. Earlier this month, the company reiterated its expectation for full-year profit to jump 50% to $17.5 million.

Clothing retailer Pumpkin Patch surged 103% to $2.01 after it pulled back from its ill-timed expansion into the U.S. market. The shares sank 64% last year after the global financial crisis sapped consumer demand in its American stores.

The two companies set the pace for the 39% gain in the NZSE Consumers Index, which was the best-performing sector on the exchange. Clothing chain Hallenstein Glasson Holdings Ltd. rose 51% to $3.30, the eighth-best performance on the NZX 50.

Goldman Sachs’ Walker said retailers should provide some good opportunities for investment next year, provided “consumer spending comes through.”

Carpet maker Cavalier Corp. ranked third with a 65% advance after it exceeded its earnings guidance and was bullish about its prospects in a subdued housing market.

Bourse operator and regulator NZX Ltd. ranked fourth with a gain of about 60% after it sold its carbon trading platform and investment in a South African bond trading exchange. Since then it has quadrupled its shares on issue to improve liquidity.

NZX benefited from record levels of capital raising by companies this year, with some $6.19 billion of debt and equity raised.

Many firms were forced to shore up their balance sheets and pay down debt by tapping investors for funds, though Walker said the majority of these companies had “decent underlying businesses.”

Firms such as Fisher & Paykel Appliances Holdings and Nuplex Industries Holdings were forced to sell shares at deep discount after their available credit lines dried up and overseas demand for their products evaporated. F&P Appliances was one of the worst performers this year as it slumped 27% to 65 cents while Nuplex was at the bottom of the NZX50, tumbling 34% to $2.90.

Walker now includes Nuplex among his picks for 2010.

“It’s got itself out of trouble” and is well-prepared for next year, he said. Walker doesn’t expect stocks to perform as well next year as they have in 2009 as markets have priced in their expectations through rising share prices.

“At this stage, companies are upgrading earnings and we’ll probably see that continue,” he said. “Markets are reasonably priced with current expectations, and values are very positive for people buying good quality companies.”

He favours Fletcher Building Ltd., Sky City Entertainment Group and Sky Network Television Ltd. as performers in 2010.

Westpac Banking Corp. was fifth-best performer in 2009 with a 59% gain, leading a rally in the NZX-listed shares of Australian lenders as it became clear they had avoided the worst exposure to the U.S. sub-prime market that hammered their U.S. counterparts.

The two worst performers on the wider stock exchange were rural finance company Allied Farmers Ltd. and rural services company Pyne Gould Corp., though both undertook hefty structural change to strengthen their balance sheets.Allied, whose shares tumbled 83% to 13 cents, bought Hanover Finance’s loan books in an all-stock deal worth some $400 million.

Pyne Gould’s shares sank 76% to 48 cents after it raised $273 million to help it take bad loans from its finance unit Marac and put them into a new company headed by George Kerr.

ING’s Brown said investors will return their focus to earnings next year after spooked markets swung wildly through 2009. As the country’s economy resumes some semblance of normality with the kiwi dollar coming down, equities should trade more on fundamentals than they have for the past couple of years.

Businesswire.co.nz

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