Dairy stocks lead NZX 50 lower

New Zealand's headline share index declined for the third consecutive session as higher interest rates and negative market sentiment continue to weigh on equity valuations.

Thursday, October 7th 2021, 6:13PM

by BusinessDesk

The S&P/NZX 50 Index fell 61 points, or 0.5%, to 13,104.6. Turnover was $130 million.

A risk-off tone continues to dwell in global markets with many equities moving lower overnight and safe-haven currencies finding good support from traders.

Meanwhile, market interest rates are holding at relatively high levels as central banks begin to consider tightening monetary policy.

Dairy stocks led the local market lower, Fonterra Shareholders' Fund units declined 3% to $3.86, A2 Milk dropped $6.24 to 2.2%, and Synlait Milk was down 0.8% at $3.60.

Bank economists upgraded their farmgate milk price forecast by as much as 75 cents per kg after the global dairy trade price index was unchanged after an auction overnight.

Westpac’s senior agri economist, Nathan Penny said the bank’s milk price forecast of $8.50 was “getting towards the upper limit of what Fonterra can pay” before it starts inducing losses in its consumer business.

The farm gate price is an input cost for dairy processors like Fonterra, A2 and Synlait.

Shares in Air NZ dropped 0.9% to $1.70 after Forsyth Barr analysts warned the airline's losses were worsening, escalating its need for a larger capital injection.

“Air NZ’s share price appears stubbornly resistant to its current economic reality,” Andy Bowley and Matt Noland said.

The analysts said the company's cash burn and contraction of its equity will continue through financial year 2022 and into 2023.

“Even after assigning value to AIR's loyalty scheme, it is difficult to justify a valuation remotely close to its current share price.”

Fletcher Building got a sunnier review from Jarden analyst Grant Swanepoel who judged the recent lockdown will affect it less than others.

Last year's national lockdown trimmed $240m off Fletcher's earnings, but Swanepoel estimates the impact this year so far is about $20m.

Shares in the construction company rose 1% to $7.14, just shy of Jarden’s $7.23 target price.

Rising interest rates weighed on electricity utilities share prices which have become less attractive investments as bond yields have recovered.

Mercury NZ declined 2% to $6.33, Contact Energy dropped 1.6% to $8.10, and Meridian Energy fell 1% to $4.90.

Forsyth Barr analysts said the sector became more expensive during September as interest rates climbed faster than share prices declined.

“The record low average yield spread of 3% to the 10-year swap rate, coupled with heightened regulatory and political risks is the basis for our cautious view on the sector at present,” they said in a note.

Forsyth Barr’s preferred electricity stock, Genesis Energy, climbed 1.7% to $3.345.

The NZ dollar fell during the day as ongoing global uncertainties associated with the pandemic reduced investor appetite for riskier assets, which includes the NZ dollar.

It was trading at 69.19 US cents today, down from 69.67 yesterday.

An ANZ economist said the NZ dollar was expected to firm a little and should be worth 72 US cents by December.

Tags: Market Close