Stock Takes: What’s the long-term side affects from Omicron on sharemarkets?

The new Omicron variant of Covid-19 played havoc with financial markets this week, amid fears of more lockdowns and further economic turmoil.

The NZX50 index traded down on Friday afternoon and Monday after news broke of the new variant, and moves by the UK – quickly followed by others, including New Zealand – to close the border to southern African countries.

But the local market has recovered to some degree since then, and by Yesterday’s close was about 120 points short of last Thursday’s closing price.

Shane Solly, portfolio manager at Harbour Asset Management, said investors may be wary for the next week or so while researchers investigate how effective existing treatments are against Omicron.

“The risk of lockdowns at this stage seems lower than in 2020 but it is something that would impact the recovery theme. What Omicron has reminded investors of is to not be complacent to risks.”

Richard Stubbs, Castle Point fund manager, said the pandemic was now what you might describe as a “known unknown”.

“There is still plenty of uncertainty, but it is being thoroughly scrutinised, analysed and worried about. Known unknowns can create volatility but rarely take down markets. It’s the unknown unknowns that do that.”

It seems that for now, Omicron’s dangers will remain on the radar for investors.

Worst year

With less than a month of trading to go, the New Zealand sharemarket seems to be heading for its worst year in a long time.

For the year to date, the NZX50 was down by about 3.2 per cent as of Yesterday’s close.

That compares to last year, when the index was up by nearly 13.5 per cent. This time in 2020, the local market was hitting all-time highs after breaking through the 13,000 points milestone.

That was despite the market having fallen by 30 per cent in late March when the Covid-19 pandemic hit home and caused the nationwide lockdown. Now the market is trading below 13,000 points.

Solly said sharemarkets typically looked over the horizon.

“Clearly the fuel being taken away from the fire in terms of this reversal of monetary policy stimulus is seeing people think about earnings rates for some of the more cyclical parts of the market.”

He said the New Zealand market was made up of a bunch of growth stocks that would keep doing alright, but then there were the electricity gentailers and cyclical stocks.

While people liked to invest in the listed power companies for certainty, they did not have a lot of pricing power.

“In this period where inflation is going up, they can’t increase their earnings very fast. That piece of the market is tough.”

Then there were the cyclical stocks like Fletcher Building, where activity had dropped due to lockdowns.

“And if this whole cycle of tighter monetary policy rolls through, then those are the pieces that are going to come under pressure. Markets have been really anxious about that.”

While Fletcher should be doing well due to the booming housing market, and had the ability to put up its prices, its share price has fallen from around $7.95 in early June to close yesterday at $6.91.

“You go ‘hang on, shouldn’t it be doing well?’ But it’s about what happens next.”

With the cost of building soaring, that could result in fewer people undertaking renovations or building new homes next year. Combine that with higher borrowing costs and tighter capital from the banks and it doesn’t bode well.

Solly said the negative return for the New Zealand market was not huge yet, but his observation was that there was potential for more negative months ahead.

“We’ve had quite a big negative month last month, down 3 per cent. We have had a market that has underperformed globally.”

He pointed to weak earnings numbers being a driver because the New Zealand economy had been slower than others due to lockdowns. On top of that, rising bond yields globally had hit the bond-sensitive gentailers. And then there was the part of the market that was just sensitive to views on where the economy was heading.

“It’s a tough run,” said Solly.

“Companies are being quite rightly cautious, there is very little guidance out there, and if there is, it is pretty wary.”

But he said there was potential for a somewhat better outcome, and that had been reflected in the latest results season, with results beating expectations – because expectations were low.

Worst stocks

Topping the list of the worst performers is a2 Milk, whose shares are down 51 per cent for the year to date, followed by Meridian and Synlait, down by 45 and 36 per cent respectively.

Digital church donation company Pushpay has seen its shares fall 27 per cent while retirement village operator Ryman was down 22 per cent.

“These are all businesses that have got good credentials but they are just not nailing it in terms of numbers at the moment,” Solly said.

He said retirement villages as a whole had been one of the larger underperformers this year, although the ageing population trend still meant they remained a good investment over the medium to longer term.

“The stocks have rewound all the gains they had over the last year.”

Solly said that in Ryman’s case, there was wariness about its gearing levels being elevated at a time when it was operationally tough – it was hard to bring people through and sell units and hard to bring people into care.

“They are under real pressure. The Government is not rewarding the sector for doing well despite a great care outcome, but are penalising them by putting pressure on this whole nursing staff issue.”

Higher pay for District Health Board nurses has seen DHBs poaching staff from the retirement sector and has forced them to match those pay deals.

Solly said listed operators were well capitalised but the private sector was doing it tough in parts.

Castle Point’s Stubbs said Ryman’s share price weakness was due to its building programme being affected by Covid.

“It also lowered its dividend payout guidance from 50 per cent of net profit to 30-50 per cent. A lot of investors are hunting for income so that never goes down well.

“Long-term demographics indicate there is plenty of industry growth remaining, but the sector is getting more competitive. It is also highly leveraged to residential property so higher interest rates and flat to lower property prices would hurt them.”

Forbar launches Octagon

Forsyth Barr has launched a specialist funds manager, Octagon Asset Management.

The broker’s managing director, Neil Paviour-Smith, said the launch of Octagon, which will have $650 million under management, signalled its ambition to evolve and expand Forsyth Barr’s established funds management offering.

“Creating an independent asset management business will enable us to access new markets, attract new talent and deliver new fund and investment opportunities,” he said in a statement.

Octagon will be led by the core Forsyth Barr funds management team including Craig Alexander, Jason Lindsay and Paul Robertshawe.

Additional key roles have been filled, with further announcements due in early 2022. The Octagon team will initially be based in Wellington, Auckland and Dunedin.

“We see real opportunity in both the wholesale and retail funds management spaces,” Lindsay said.

Octagon will start off as fully-owned by Forsyth Barr but it is intended to include Octagon staff as shareholders.

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