Sharemarket outlook

The New Zealand sharemarket remains at fair value but opportunities exist in telecommunications, gaming and consumer stocks, Morningstar says.

Saturday, April 19th 2014, 12:44PM

The market’s love affair with healthcare stocks could turn sour should valuations correct
Health care encompasses companies such as Ryman Healthcare, Fisher & Paykel Healthcare and EBOS Group.
We believe health-care stocks in general will beneﬁt from an ageing population which is expected to grow at a faster rate than the overall population. We believe the share prices of New Zealand health-care stocks are more than pricing in the growth prospects and valuations appear stretched at the moment.

While we see no imminent catalysts for repricing, other than rich valuations, we believe investors should be cautious and wait for a decent pull-back before initiating positions.

The electricity sector appears cheap as regulatory concerns and weak demand weigh on valuations

The utilities sector encompasses ﬁrms that generate, retail and distribute electricity.

The New Zealand electricity market is dominated by four major vertically integrated power companies, including the recently-listed Genesis Energy. The biggest four players enjoy efﬁcient scale, which acts as a signiﬁcant entry barrier, because potential new entrants might ﬁnd the New Zealand power market insufﬁciently appealing as a result of a small population base and limited growth prospects relative to markets globally.

Overall, we believe stock prices of electricity companies are accounting for some of the risks and appear attractive, especially from a dividend yield perspective. The listing of Genesis Energy could cause some near-term weakness in valuations as investors rejig their portfolios by rotating out of listed electricity stocks and into Genesis which has a much higher dividend yield.

Transport sector slightly overvalued
The transport sector consists of businesses such as freight and logistics, port operations, airports and airlines.

The sector has slightly outperformed the market during the past year with Air New Zealand and Auckland International Airport being the stand-outs.

A pick-up in the economy should translate to higher volumes for logistic companies such as Freightways and Mainfreight. Port of Tauranga is reaping the beneﬁts of strong log exports through the port which we expect to continue in the medium term on the back of strong Chinese demand.

The telecom sector is trading close to fair value but Telecom still looks good value
While the New Zealand telecommunications sector is trading at fair value, we still see narrow-moat Telecom New Zealand as undervalued and is our preferred pick in the sector.

No-moat Chorus is trading slightly above fair value and, in our view, remains a riskier proposition given a hostile regulatory regime and uncertainty around long-term regulated prices.
Network investment and aggressive pricing saw Telecom gain further traction in mobile in the December half, adding 6% to its subscriber base during the period. While we recognise the near-term margin impact of focusing on market share, in the medium term we believe Telecom can establish a leading market position and leverage its broad product suite through bundling.

Strong economy buoys New Zealand property
The strengthening conditions for New Zealand property stocks during 2013 have carried over into 2014 and we see no pressing threats. Economic commentary accompanying the decision by the Reserve Bank to raise the overnight cash rate from 2.5% to 2.75% points to a positive outlook for owners of commercial property.

These include rising business hiring intentions, growing demand from within Asia for agricultural products and 3.5% growth in real consumer spending. However, upside in rents over the coming years is likely to be partly offset by a gradual increase in borrowing costs.

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