NZ equities shrug off bond rally and war threat

New Zealand’s central bank today increased the official cash rate to 1% and signalled it would likely climb to 3.5% in the next three years.

Wednesday, February 23rd 2022, 6:43PM

by BusinessDesk

This pushed government bond yields to a six-year high and the kiwi dollar up half a US cent to 67.76 cents – the highest exchange rate since mid-January.

Local equities held their own, with investors buying up stocks ahead of a wave of earnings reports due in the morning.

The S&P/NZX 50 Index rose 20 points, or 0.2%, to 12,134.42. Turnover was moderate at $142 million.

This bucked the global trend, with international markets plunging as Russia and Ukraine teeter on the edge of a war that could drag in other western powers.

However, the corporate earnings season and local monetary policy decisions were more front of mind for NZ investors.

Fergus McDonald, head of bonds and currency at Nikko Asset Management, said NZ bonds were set to rise regardless but the Reserve Bank of NZ “certainly pushed them along”.

“The market had been pricing in a terminal OCR at about 3%, so RBNZ coming out with 3.3% was a bit more hawkish than the market was thinking,” he said.

The biggest moves were in the shorter-term bonds, which are more influenced by RBNZ’s base rate. The 2-year and 5-year bond rates both jumped roughly 12 basis points, to 2.4% and 2.6%, respectively.

The longer term 10-year rate was less affected by the decision. It climbed 9 basis points to 2.8% and is still below its highwater mark.

“A hawkish central bank that controls inflation is ultimately good for the higher end of the market, because it means it is more likely that inflation will be controlled,” he said.

The RBNZ identified inflation as the “most significant risk” that currently faced the economy, a change of tune from previous statements that emphasised the economic risk of covid.

McDonald said the higher interest rates signalled today was supportive for the NZ dollar – which last month traded as low as 65.5 US cents – but would usually be a negative for equities.

Equities buck higher rates

“The higher interest rates go, the less cashflows generated by the company are worth; therefore, the share price falls,” he said.

However, he said rates were unlikely to rise enough to worry equity markets significantly and investors would be more interested in what comes out of earnings results.

“While it is a little bit of a headwind, perhaps the equity market may be strong enough to shrug that off over time,” he said.

Investors had their minds on earnings today and companies that have reported, or are about to report, led the index higher.

Sky Network Television, which is set to report half year results on Thursday morning, surged 9.8% to $2.69.

Forsyth Barr analysts said they were looking for total subscriber revenue to have grown for the first time in five years and the announcement of either a dividend or share buyback.

“We believe Sky will have to deliver on one or more of its key milestones related to subscriber revenues, programming costs and capital management in order to hold or add to its recent strong performance,” they wrote.

Auckland International Airport jumped 2.5% to $7.12 and Air New Zealand was up 2.3% at $1.59, ahead of their reports tomorrow.

Investors will be hoping to get an update about the airport’s outlook now that it has a timeline for reopening NZ’s border, but the results themselves should be unremarkable.

Air NZ could plausibly announce a billion-dollar capital raise, but some analysts think they are likely to defer it.

Jarden analysts said the border reopening was an important development, but the severity of omicron might be the deciding factor in whether the raise goes ahead.

Outside of the top 50 index, shares in media company NZME surged 15.8% to $1.32 after it reported earnings had matched last year despite difficult conditions.

Jarden head of research Arie Dekker said this showed resilience and a cautiously positive outlook for 2022, which was likely to be well received by investors.

It wasn’t all good news: shares in Meridian Energy plunged 5% to $5 after it reported flat operating earnings for the six months to Dec 31.

The renewable energy firm bargain basement power prices for the Tiwai Point aluminium smelter held earnings back.

Chief executive Neal Barclay made it clear that he would not write new contracts with NZ Aluminium Smelters without much greater load flexibility to deal with low hydro lakes, a sustainable power price, and a long term commitment to operations in NZ. The smelter was to have closed in 2024, but is now seeking to extend its life.

Meridian's net profit after tax was dramatically lower at $145m, because of the impact of unrealised changes in the value of electricity contracts.

Jarden senior analyst Grant Swanepoel said this was a good result considering the first half of 2021 still had the old Tiwai contract in the numbers.

Tags: Market Close