NZ stocks head for best year in five, may struggle to repeat gains in 2018

New Zealand's benchmark stock index is headed for a 22 percent gain this year as investors chased growth stories ranging from infant formula to technology and tourism. Headwinds may prevent a repeat in 2018.

The S&P/NZX 50 Index hit a record high 8,401 this year and is on track for the best performance since 2012, in line with global markets with many other indices at records.

Mark Lister, head of private wealth research at Craigs Investment Partners, says that while investors will be happy, this year's growth has to be considered in the context of last year's declines. Between September and November 2016, the NZX 50 dropped as much as 12 percent from its then-record 7,571.1 on Sept. 7.

The first part of this year's gains was "more of a rebound than us going onwards and upwards", Lister said, and about 5 percent of this year's gains come from dividends, which are included in New Zealand's benchmark index though they are excluded from many indices around the world.

The benchmark index was unperturbed by the general election in September although a predicted slowing economy in the year ahead could take some money off the table, Lister said.

"The housing market is probably going to go sideways rather than up, that will probably put the breaks on consumer spending. Migration continues tapering off a little bit and we've got policy change which creates a bit of uncertainty," he said. "What you'll see is the pace of growth will slow and some of our tailwinds will lose a bit of steam. Next year might be a bit more subdued, higher volatility and the pace of growth might be a bit lower."

"There is also lots of global risk - some markets around the world are at much higher highs than ours and there is certainly no shortage of risk offshore," he said. "There is all manner of things that could hit us next year. It's definitely a time for being a little bit more cautious and conservative."

The Reserve Bank's November forecasts have quarterly economic growth rising to 1.2 percent in the first three months of 2018, before slowing to 0.7 percent in the final two quarters.

The top performer on the NZX 50 this year has been A2 Milk, which has soared 278 percent to $8.05, while its production partner Synlait Milk has gained 132 percent to $7.25.

The two milk stocks have moved in tandem for much of the year, despite the businesses being quite different - A2 markets its A2-protein branded milk products, particularly in the form of baby formula, while Synlait is a dairy processor. A2 owns about 8 percent of Synlait which supplies its dairy products. The share prices seem to have decoupled of late, but both have benefitted from strong demand in China for A2's products, each reaching record highs during the year.

Other top performers this year include Fisher & Paykel Healthcare, up 64 percent this year; Tourism Holdings, which has gained 49 percent; Air New Zealand, which has risen 45 percent; and Scales Corp, up 39 percent.

"What all of the companies have in common is they are real growth stories - be it by technology and software, branded products like infant formula or healthcare products, or tourism - that sector has had a very strong year," Lister said. "There has been loads of really strong returns from particularly growth stocks."

One of the most notable stocks of the year has been one which is no longer a member of the NZX 50 - Xero, which ditched the local index earlier this month in favour of listing solely on the Australian stock exchange. Company management has long criticised Kiwi media and analyst coverage as overly negative, and said the shift would increase its relevance "to a more diverse range of large investors". The stock has dropped 7 percent since the company said it was leaving, though it has gained 77 percent in the year and will keep trading on the main board until Jan. 31 next year.

Xero has been replaced by another tech stock, Pushpay Holdings, which has gained 195 percent this year, making it the second-best performing stock on the NZX 50, as its charitable giving app continues to gain ground in the US. Pushpay itself is planning a US listing and likely a capital raising within the next 15 months, but says that won't mean de-listing from the NZX or ASX.

Stockmarket operator NZX has seen its own share price rise 7 percent over 2017, a year which saw the company undertake a five-month operational review. It released a new strategy in November, which it said was a fundamental reset of the business to drive shareholder value and reinvigorate New Zealand's capital markets. The market has seen just one initial public offering this year - from Oceania Healthcare - though Vodafone New Zealand is a strong contender for an IPO next year.

"It's something NZX is going to have to think about pretty carefully, how to generate new listings," Lister said. "We've got all of this Kiwisaver money that's growing, every week, every month, and that needs to go somewhere. A lot of it goes offshore because we have a small market, investors have to turn their attention to international opportunities, but we'd like to support local companies that are growing. It's not simply 'oh the NZX has done a bad job', it's not as simple as that."

Despite the building boom, construction stocks have not fared as well this year. Metro Performance Glass has plunged 48 percent, making it the worst performer, while Fletcher Building is down 28 percent in the year.

"Metro Performance Glass and Fletcher Building do stand out," Lister said. Earnings downgrades, more than one, all the issues with the construction division, change of CEO and other executives - a really rough year for Fletchers, and Metro Glass has been worse again. They've had a shocker, they've really disappointed the market and haven't been able to deliver at all on expectations."

Lister said that investors have learned that a macro tailwind such as a construction boom doesn't equate to success from every company in that industry.

"There are two sides to it - the industry can be in the right position, but the company needs to do a lot of things right," he said. "Fletcher's is an interesting one. If you take out the B+I division, they've actually gone okay, the other divisions are doing fine. Placemakers is selling loads of stuff. It's not right across the board, it's just that Fletchers is a big company these days and with one division having made some pretty horrendous judgement calls about contract pricing, that's dragged down all the other divisions. There are lessons for investors and management alike."

Sky Network Television was the second-worst performer, falling 38 percent. The pay-TV operator was knocked back by the Commerce Commission over a planned merger with Vodafone New Zealand and its shares dropped further in August after it reported annual profit slumped 21 percent to $116 million as revenue dropped and increasingly expensive content squeezed its margins.

Outside of the NZX 50, Serko has soared 624 percent, last trading at $2.10. The online travel booking software developer has booked most of those gains since October, when it posted its first mid-year profit and reiterated its expectation to post a maiden annual profit.

Energy Mad has been the worst performer on the All Index, down 89 percent, with Veritas Investments plunging 70 percent and Plexure Group down 56 percent this year.

(BusinessDesk)