[Video: Question and answer session with Max Lesser, ANZ’s Head of Equities, New Zealand.]
Question: What did you learn from the recent reporting season?
Max Lesser: The recent reporting season came in below market expectations with the NZSE50 falling almost 4% during the month of August. The focus of the reporting season is less about the results for the year passed and more on the guidance for the new year. The reason for that is that companies update guidance throughout the year so it’s very rare that a result will come in too different to what the market is expecting. However, guidance provided for the new year is the first time the market gets to see what the company is expecting. And, in that respect there were more downgrades to analyst expectations than there were revisions upwards. While looking at forecast on a line by line basis revealed that revisions to revenues were fairly mixed but revisions to operating costs and interest expense were both higher and hence that was the source of the downgrades.
Question: How important are interest rates to equities?
Max Lesser: Interest rates and inflation are very topical at the moment. And, so long as you believe that share prices follow, rather than sentiment, but the intrinsic value of a company then they are very important to equities. There’s a few different way of explaining that linkage but possibly the easiest one is by recognising that an investment in equities is more risky than an investment in bonds. But, if the interest rates paid on bonds goes up, the expected return from equities needs to also go up.
Question: Which are the most relevant interest rates?
Max Lesser: That’s a great questions because there are many different types of interest rates. Because companies do not pay out a 100% of their cash earnings and reinvest part of those cash earnings back into the business, the returns to investors from investing in equities is over a long period of time so the most appropriate interest rates to compare them to with are longer dated maturities that you get from say Government bonds rather than say term deposits. And, taking this a step further, because of that reinvestment that companies make in their business you can view them sort of like Grandfather’s Axe where those businesses should be able to sustain their earnings going forward and achieve earnings that at least keep pace with inflation. And therefore, the most relevant rate for comparing with equities are the returns on index linked Government bonds over a maturities of 10 or more years. So, in terms of the Government 10 year linker bond interest rates, they started the year just a bit above 2% and they fell for the first few months down to about 1.6% but since then they’ve climbed quite strongly to 2.8% which is the highest they’ve been in over 10 years. So, that’s quite concerning, especially considering the NZSE50, over the same period of time, has declined only a few percent.
Question: What is the outlook for New Zealand equities?
Max Lesser: Well, we’ve been talking about macro issues such as earnings downgrades and interest rates, so on the basis of those our outlook is cautious. But I should add, that the New Zealand market is very concentrated with just three stocks representing more than 25% of the index and ten stocks representing over 60% of the index. So, it’s quite likely that there’ll be some company specific or industry specific factors which have a greater impact on the share price than those macro factors. And, in fact, the way that we put together our portfolios at ANZ is that we choose companies of the highest quality which we believe will count for more over the long term than the macro forces they’re facing.
Published 22 September 2023. Information can change, is general, and not advice.
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