At last! The word oversold – market jargon for “too cheap” – is starting to reappear in analysts’ recommendations. This suggests investors are readjusting to the hefty share price falls of the past two months, and looking for bargains.
We are also getting buy recommendations. Among stocks to score these last week were the ANZ Bank, after its latest profit rise (which Australian analysts reckon makes it the best-performing Australian bank) and Telecom.
Telecom got its tick from ABN AMRO in an analysis of the latest ruling from the telecommunications regulator on bitstream access. This had been assumed to favour Telstra.
ABN AMRO said Telecom continued to operate in a moderate regulatory environment and with relatively favourable competitive conditions. The investment in its network should allow Telecom to reap early cost and competitive benefits.
It was generating surplus cash, was expected to raise its dividend payout ratio to 85 per cent, and was to undertake a substantial capital management programme. ABN AMRO put a target of $6.52 on the stock.
On Friday, Telecom sold its INL shares for about $271 million, an $86 million profit, and this lifted its stock 5 cents to $6.06 during a positive day’s trading, in which sentiment was further boosted by Contact’s profit.
ABN AMRO also advised clients that Hellaby Holdings was oversold last week, though recommended it as an “add”. Given the unsettled state of Friday’s market, it is understandable analysts are kicking for touch – even when they issue a highly positive report on a company.
Another positive is that some strategists believe the market is returning to “fair value” after the shake-out. This is a turnaround from January and February when just about everyone agreed most stocks were fully priced, and it wasn’t easy to see where to invest your money.
It is always difficult to guess when a market hits bottom, though a careful reading of recent broker strategy reports, designed for institutional rather than ordinary investors, shows some are readying themselves for brighter times.
ABN AMRO’s Benedict Slykerman said last week that “spots of value” were starting to reappear. “Our next major strategy call will be finessing the timing of a switch back to cyclical stocks . . .. This is not the time to go yet, but the value-conscious should be thinking about it.”
He believes the market will concentrate on reliability of earnings over the next year. The time to rotate from high-quality defensive stocks to those with more cyclical earnings has yet to come, though when it did, those who held these companies would be “richly rewarded”.
In his study, Mr Slykerman reported that ABN AMRO’s discounted cashflow model showed the market was trading at an 11.2 per cent discount to fair value. His firm’s consolidated market forecasts suggested that New Zealand business was in good shape, with an impressive ability to generate cash.
“Corporate New Zealand’s balance sheet is in very sound order, and companies are generating significant levels of free cashflow,” he said.
The market was able to support a very high dividend yield, which was tipped to rise to 7.7 per cent this year and 8.9 per cent in two years.
Mr Slykerman added that the attractiveness of corporate dividend flow, compared to a 10-year government bond, should underpin the New Zealand equity market and provide a cushion should any adverse economic outcome occur.
Jason Wong at First NZ Capital said investors should continue to follow a defensive stance with New Zealand equities because more earnings downgrades were likely. He advocated an underweight position in local shares, saying that they would struggle to beat returns on cash deposits.
However, Mr Wong said “there will be a time, perhaps in the not too distant future, when we need to adjust our equity strategy”.
Stocks that had been beaten up by macro headwinds would suddenly become attractive again. “We don’t think we are at that point yet, but are keeping a close eye on developments.”
Both men’s views are designed to be read by the big players, the institutions that are watching the market closely and looking for leads.
And so is everyone else. It is not too hard to guess what is likely to happen to New Zealand share prices each day. All you have to do is tune into National Radio at 8.30am on weekday mornings for the closing Dow Jones index from Wall Street.
Keeping an eye on the Reserve Bank is also essential. It surprised many in March by unexpectedly lifting rates a further 0.25 per cent. This was the catalyst for what has so far been a much greater fall in New Zealand equities than in offshore exchanges. The New Zealand market has fallen by about 10 per cent, compared with 4.5 per cent in global equities.
The bank’s actions have also prompted surprising strength in the Kiwi dollar. This is causing increasing headaches for many exporters as their forward cover arrangements expire. Most had expected the Kiwi dollar to be a lot lower against the US currency at this stage.
Last week, the Reserve Bank issued yet another surprisingly hawkish statement suggesting it might have to lift rates yet again to cool inflation. This gave the dollar another upward nudge. It is widely felt that the bank is bluffing, and is unlikely to move rates up again – but it might. Whatever the outcome, the time when the bank gets around to making cuts in the cash rate seems to be some time off.
Headlines are focusing on the stocks that have slumped badly, usually as a result of issuing profit warnings, though many have made only modest falls, and the odd one like BIL International has risen.
Investors with property stocks will barely have noticed anything is wrong. Most of these stocks are trading not far below, or still around 2005 highs. These include AMP Office, ING Property, Calan Healthcare, Macquarie Goodman and National Property Trust. Yields, though with varying degrees of imputation, range from 7.61 per cent to about 10 per cent.
Many industrials have taken the biggest knocks, including some that were flying high a month or two back.
The slide in their fortunes has led to a rapid rise in dividend yields. Those offering over 9 per cent (including imputation credits) include Sky City, Hellaby, Nuplex, New Zealand Refining, Colonial Motors, Richina Pacific, Team Talk and Hallensteins.
By Terry Hall
Source: Stuff NZ
Photo credit: Ahmad Nawawi via VisualHunt.com / CC BY-NC-ND
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