WEALTH BUILDER

WEALTH BUILDER FRONT.jpg
 
 
 

Industrials

Definition

The industrial goods sector covers goods produced, including agriculture, construction, fisheries, forestry, and manufacturing. 

The landscape

The sector is an odd one, given its collection of what appear to be unrelated companies linked to transport, building products, and professional services. While 2017 provided a mixed bag of results, as a general rule, the trend for share prices was definitely up. 

Winners and losers

Opus International was a standout, following the helpful hand of a corporate takeover. Mainfreight continued to truck along, and a particularly strong contribution from Australia gave it another good year. Air New Zealand was named Airline of the Year and was one of the better share-price performers. Local glass manufacturer Metro Performance Glass was perhaps the biggest disappointment in a group where disenchantment was hard to find. It’s been a challenging start to listing for a company which should have performed better, although green shoots did appear towards the end of the year. 

My prediction

Looking ahead, it’s difficult to see what will change. Metro Performance Glass should benefit from a supportive government, but whether it can profit remains the key question. Mainfreight is exposed to offshore markets in a sector benefiting from structural change, so finding support shouldn’t be hard. Analysts predict a slowing in our domestic economy, so offshore earners are preferred over local. Auckland Airport enters 2018 with a higher capital spending programme, which will have an effect on profit growth. Finding value among the industrials sector remains difficult and, where it does exist, it often comes with some health warnings.

 

Information Technology

Definition

The information technology sector is made up of goods and services to do with technology, research, and development. It contains firms working in electronics, software, computers, and programming.

The landscape

Technology has long been considered the sector of opportunity, and many famous names are at its heart. History shows investors have won and lost fortunes from these investments which, quite frankly, many struggle to value. Investing in this sector isn’t for the faint-hearted, with many firms needing a steady stream of money and shareholder loyalty to survive. 

Winners and losers

Some make it, some don’t; and 2017 proved no different, with Wynyard finally succumbing to the liquidator in February and delisting in May. Most, though, enjoyed a better year, and none more so than Xero. Had it not announced its delisting from the New Zealand market, the year would have been one to remember for a name that is nearing a maiden profit. Thankfully, today the sector is not solely reliant on Xero. The likes of Eroad, Gentrack, and Pushpay have all enjoyed a better year and are quickly developing a following. 

My prediction

Looking ahead, capital or, more importantly, the need for it, will be a feature for many companies. Many are priced for potential, more than actual, earnings, so positive commentary and revenue growth are pivotal to get them support. History also shows a positive re-rating can as easily be followed by a de-rating, with no apparent justification. Takeovers are rare, but can never be ruled out, but the temptation for founding shareholders to take profits must be increasing. We’ve seen early signs of this already. Either way, the sector will stay a game you can win or lose.

 

Materials

Definition

The materials sector is companies that explore for, extract, develop, and process raw materials. Key components are chemicals, construction materials, mining, containers and packaging, and forestry products.

The landscape

There was only one name talked about all year in this sector – Fletcher Building. Entering the year, investors had high hopes, but these soon evaporated. A backdrop of low interest rates, a strong housing market, infrastructure projects, and a supportive government did little to help a sector facing rising costs. 

Winners and losers

Despite Fletchers grabbing the most attention, labour shortages and wage rises meant these problems weren’t unique to them. These led to cost overruns, ongoing write-offs, and endless rumours, all distracting from day-to-day management. An inability to offer certainty around outstanding work meant investor sentiment quickly turned sour. Fletchers became a difficult proposition. Steel & Tube faced similar troubles, hurt by Commerce Commission charges over breaches to the Fair Trading Act and intensifying competition. Returns for the sector were hard to come by.

My prediction

Looking ahead, it will be all about one of two things for Fletchers: the size of further provisions or the potential sale of non-performing assets. Fletchers is big enough to survive the 2017 nightmare, but it needs to restore its credibility, and that starts with communication that can be relied upon. Most dismiss the latest announcement as being the last on cost overruns, but all eyes will be focused on the Commercial Bay development, which is nearing completion.

 

Telecommunications

Definition

The telecoms sector is made up of companies connected to phone, satellite, or internet services, or those that create the infrastructure to send data around the world. 

The landscape

In the past, when you mentioned the word telecommunications, eyes would glaze over. People talk about their own problems – lack of internet connectivity, phone charges, or the latest handset – rather than how each firm generates profits or offers dividends. Regulation has forced many to succumb to increasing capital demands, globalisation, and price pressures. Cost-cutting was another feature last year for a sector enjoying the benefits of increased data usage. 

Winners and losers

Traditional business continues to follow a path to nowhere, which is perhaps why we have seen the likes of Spark search for alternative sources of revenue. Competition is intense, but it was perhaps the Commerce Commission’s decision to rebuff a merger between Sky TV and Vodafone New Zealand, which surprised many. It had a big effect, given the reliance on content to drive demand, prices, and remain relevant. Content is pivotal to remaining king. 

My prediction

Looking ahead, all eyes will be on the Vodafone New Zealand listing on the stock exchange, which is expected in the first half of 2018. It might be our only initial public offering this year. Competition will not go away and could even intensify, given the increased scrutiny that comes with listing. Telecommunication companies have always offered reliable income. I don’t see this changing, but profit growth appears, at best,
flat for 2018. 

 

Utilities

Definition

The utilities sector is a group of stocks in utility companies, such as gas and power suppliers and distributors, such as electric, gas, and water firms, and power resellers. 

The landscape

When investors consider utility companies, they tend to think about reliable income from electricity companies, which are effectively under government control. Outside of weather, most don’t consider other factors that could just as easily affect future demand and profits.

Winners and losers

In the past, there’ve been concerns around New Zealand's Aluminium Smelter, but it was hardly mentioned in 2017. Investors instead focused on renewable energy, electric vehicles, and carbon emissions, following the change in government. New Zealand First’s campaign message about buying back electricity companies grabbed headlines, but never gained traction. However, this didn’t stop talk of increased regulation. Return-wise, you could have thrown a blanket over the entire sector. There was little difference in firms’ performances and where they varied, it was around the edges. Capital management continued to be a highlight, with improving dividend payments a welcome relief.

My prediction

It’s difficult to see why the past won’t be repeated. Balance sheets remain healthy and changes in management here and there won’t move the dial. Increased government spending is unlikely to see any negative policy introduced. The sector is a great source of income. Should New Zealand's Aluminium Smelter decide to leave, we expect the sector to quickly rebalance. There hasn’t been any major investment in new power generation for some time, so demand is catching up to supply. It’s a safe place to park, but I think it’s hard to see how 2017’s performance could be repeated.

 

Consumer Discretionary

Definition

The consumer discretionary sector covers goods and services that are non-essential but which people buy when they can afford them. They include electrical goods, clothing, entertainment and leisure products, and cars. 

The landscape

Over the past few years, the consumer-discretionary sector has struggled to attract investors. The rapid take-up of online buying has clearly caught out many companies. This consumer behaviour isn’t new, yet many retailers have been too slow to adapt. Old-school bricks-and-mortar structures are so ‘yesterday’. Low wage-growth, higher living expenses, and a stronger New Zealand dollar also haven’t helped a sector that’s desperate for your spare dollar for its survival. 

Winners and losers

This year, the single biggest issue facing many retailers is Amazon. It’s seen by many as a category-killer, with an indiscriminate global distribution footprint, able to deliver almost anything a customer could ever want. Amazon’s arrival saw many companies become even more friendless than they already were. Looking ahead,
I see little change. In the past, New Zealand ran ‘Buy Kiwi-made’ campaigns but, without divine intervention or commercial revolution, this sector appears destined
for more change. 

My prediction

Despite Kiwis being a resilient bunch, it appears old-world traits around loyalty have been lost with the new-world shift. A good big guy will beat a small guy every time. Unless you have good local brand presence or hot food, then it appears the odds are stacked firmly against David’s camp this time round. 

 

Consumer Staples

Definition

Consumer staples are the products people need to buy, such as food, drink, and household items. They’re goods that people are unlikely to cut out of their spending even when their budget is stretched.

The landscape

Who would have thought this sector would dominate discussion this year? Globally, this sector is associated with companies that are stable, low-growth, and steady income-generators, linked to domestic consumption. It couldn’t be any more different in New Zealand, with high-octane growth names ruling a sector which has effectively driven this year’s stellar market return. 

Winners and losers

Leading the pack is A2 Milk, a company that not long ago was cap-in-hand looking for capital, in the hope it could continue living the dream. The debate still rages over whether A2 is good marketing or actual science, but it’s living proof of how to become successful in the global world. Innovative marketing, a strong brand, loyal support, and low-cost distribution have been behind its rapid rise. The sector performance can be summed up by news flows. Anyone issuing positive announcements has been rewarded.Growth hasn’t been a smooth ride for all; ask Comvita and Trilogy, who have both stumbled at one point.     

My prediction

The sector is interesting, but perhaps overdone on a risk-to-return measure. Growth companies seldom enjoy a one-way ride, so caution is needed, particularly for those that have enjoyed the kind of returns not seen since the dot-com era. As then, there’s always a danger of investors becoming overzealous. Any slight hiccup could see support evaporate. History is littered with examples. 

 

Healthcare

Definition

The healthcare sector is a group of shares relating to medical goods or services, including private hospitals, retirement villages, insurers, biotech, and medical products.

The landscape

 When investors think healthcare, in New Zealand what they’re really thinking is Fisher and Paykel Healthcare. It has been the sector pin-up, with an established track record that is the envy of all. It consistently grows earnings and seldom disappoints, making it a genuine success story. 

Winners and losers

This year we’ve seen much of the same: under-promise, over-deliver, and a share price materially higher than where the year began. The sector, though, is more than just Fisher and Paykel, and it would be remiss to ignore retirement operators. Rising house prices help development profits, but they also raise concerns around future village affordability. It was this investors focused on, because any big correction to house prices could have a material impact on future village profitability. There was a lot of debate about the new government’s housing policy, which has made investors a bit more cautious than they were in previous years.

My prediction

Looking ahead, I expect investors will adopt a more short-term focus on Fisher and Paykel Healthcare, and we’re already seeing this now. I don’t expect to see any sector slowdown, but lingering legal action over patent breaches and the impact of currency look set to become part of daily discussion – and a share price that is likely to be a little more volatile. Interest-rate movement and any government intervention aimed at addressing the hot housing market will be key for the retirement sector. While I struggle to see sector consolidation, as some suggest, it can’t be ruled out, given the undeniable benefits which would come from it. 

 

Financials

Definition

The financial sector is made up of shares in companies offering financial services, including banks, investment funds, insurance companies, and real-estate firms.

The landscape

This sector is the go-to zone when things get tough. At the heart of the sector, you’ll find insurance, banking, and property-related names – usually no surprises, and income certainty. This is why it’s been one of the better performers since the global financial crisis. The pursuit of equity income has driven many share prices higher, while interest rates have remained low. Profit payout ratios increased, special dividends were announced, and share buy-backs enticed investors to remain. But this now feels so last year, with 2017 performance indicating their appeal has waned. Behind this general lack of interest are an expectation that interest rates will rise, a lack of earnings growth, and fears of regulation.

Winners and losers

Of course, there are always names that stand out, with Heartland Bank and Tower featuring this year. Tower’s performance was interesting, and perplexing. Problems linked to Canterbury earthquake claims have plagued it, but an unexpected takeover approach saw its share price almost double. A Commerce Commission decision to reject the favoured partner left many scratching their heads, and meant a share-price-gain unwind.      

My prediction

Looking ahead, all eyes will be on a review of the Commonwealth Bank, for alleged compliance breaches. The finding may have a broader impact. Tower will enter 2018 on tenterhooks awaiting court findings. These will prove pivotal for the next stage in its journey. Either way, the sector looks sure to remain in the spotlight.  

 

Energy

Definition

The energy sector is made up of shares in companies producing or supplying energy, including electricity and gas companies, and those exploring or drilling for resources like oil or gas.

The landscape

Looking at returns, you could be forgiven for thinking this sector has been steady and stable. It just goes to show, you should never judge a book by its cover. The story is rather different to what the headlines would have you believe. Corporate activity, regulation, and a leaky fuel pipe all featured within a sector subject to lots of activity in 2017. 

Winners and losers

NZ Oil & Gas shareholders benefited from global interest in a business that was literally digging itself out of a 2016 low point. The share price of NZ Refining started the year well. But a stronger New Zealand dollar against the United States dollar and damage to its main Auckland fuel pipeline, which created shortages, became political fodder. The timing clearly wasn’t ideal for a company about to enter a more intensive capital period. Z Energy also faced its fair share of turmoil. It had just integrated Caltex into its operations when the Minister of Energy requested a review into fuel pricing – at a time when the market also appeared to discover electric vehicles.

My prediction

Looking ahead, a favourable outcome from the review appears more important than ever for Z Energy. How anyone can unravel the detail and get a sensible finding will prove difficult. It’s bound to be a lengthy process, which suggests more uncertainty. The movement to electric vehicles needn’t mean the untimely end of Z Energy. A healthy and growing dividend may be the best investors can hope for until clarity returns.