Coronavirus fears boost demand for yield plays

New Zealand shares rose as companies paying reliable dividends became more attractive in an environment where fears over the economic impact of the coronavirus outbreak have pushed down global bond yields.

Tuesday, February 11th 2020, 6:31PM

by BusinessDesk

The S&P/NZX 50 Index gained 131.95 points, or 1.1 percent, to 11,834.54. Within the index, 30 stocks rose, 11 fell and nine were unchanged. Turnover was $181.4 million.

The yield on the US 10-year Treasury has dropped about quarter of a percentage point so far this year as investors fret over the impact of the coronavirus outbreak on the global economy.

ASB Bank economists predict the outbreak will slow New Zealand's economic growth by 0.6 of a percentage point. Finance Minister Grant Robertson today said the government's books were strong enough to weather the downturn.

Traders have been closely watching this week’s post-holiday restart of Chinese factories for signs of virus-related disruptions. Investors have been relatively upbeat as stock markets across Asia followed Wall Street higher.

Matthew Goodson, managing director at Salt Funds Management, said investors were happy to look past the coronavirus risk when there were other factors to trade on.

“New Zealand market is just following on from what’s happening globally. There is still a fair bit of uncertainty about coronavirus but there seems to be some degree of relaxation, even if there is not a lot of hard evidence for that,” he said.

“The other thing we’ve seen with coronavirus fears, is that bond yields have fallen a fair degree around the world, putting some of the yield and growth stocks back on the radar again.”

Utilities and property stocks typically benefit when interest rates are low, in that their dividend yields become more attractive.

Contact Energy rose 3.5 percent to $7.47 on a volume of 1.6 million shares, slightly above its 90-day average. The electricity retailer-generator yesterday reported a 21 percent decline in first-half earnings. Research house Jarden today raised its recommendation on the stock to ‘outperform’ saying Contact offered attractive value as the market had not priced its potential for growth in geothermal energy. It also said there was only a 15 percent chance of Tiwai Point smelter being closed.

Meridian Energy, which is the smelter's biggest supplier, rose 2.8 percent to $5.60 on an average volume. That was boosted by the prospect of the Electricity Authority allowing small number of big businesses to claim a discount on their electricity transmission charges.

Spark New Zealand rose 1.5 percent to $4.82 on double its average volume, with 4.5 million shares traded.

Goodson said property stocks were finding strong support as an alternative to bond yields.

“Returns on any time frame from listed New Zealand property stocks, you are talking mid-teens compound returns which are quite extraordinary. That follows straight on from the collapse of bond yields,” he said.

Ryman Healthcare rose 4.1 percent to $16.40, Argosy Property rose 2.1 percent to $1.44, Stride Property rose 0.4 percent to $2.37 and Precinct Properties New Zealand rose 0.3 percent to $1.875 on above average volume of 1.5 million shares.

Synlait Milk led the market higher, up 4.6 percent at $8.27 on slightly below average volumes. Jarden upgraded its recommendation on the stock to 'neutral' with the 12-month target price increasing to $8.84 from $8.50. Analyst Arie Dekker said in a note to clients that the risk-reward is now more balanced, with valuation still focused on long-term return.

Kathmandu Holdings fell 0.3 percent to $3.53. Jarden downgraded its rating to neutral, saying the current share price accurately reflects the balanced risk presented by the company following their acquisition of surf clothing brand Rip Curl.

Sky Network Television saw the day's biggest decline, falling 1.6 percent to 63 cents, continuing its downward slide. The media group is scheduled to report first-half earnings tomorrow.

Outside the NZX50, Scott Technology rose 4.8 percent to $2.17, following an announcement the company won a multi-million-dollar contract to design and build an automated mine laboratory in the Pilbara region of Western Australia for Rio Tinto.

Peter McIntyre, an investment adviser at Craigs Investment Partners, said winning the contract from such a large company offered prestige as well underwriting future cashflow.

Salt Fund’s Goodson warned that coronavirus couldn’t be ignored long term and would be a dominant theme throughout earnings season.

“Coachlear came out with a small downgrade blaming coronavirus affecting its ability to perform implants in the Chinese market,” he said, referring to the ASX-listed ear implants manufacturer.

“I’d expect that might be the first of many companies in the next week or two pointing to coronavirus having an impact on their business.”

Tags: Market Close