Equities Outlook

2022 was a TINA turner, but will ’23 leave us needing another hero?

For the last few years, the global investment market has rocked to the sound of TINA – the acronym commonly used to express that There Is No Alternative to equity or real asset investments. While the maxim has rung true through an extended period of low interest rates, as central banks have used rate rises to rein in runaway inflation and the market has applied discount rates when valuing equities, the appeal of cash and fixed interest investments has grown rapidly.

At time of writing [November 2022] the S&P/NZX50 is down 12.5% year to date, while the New Zealand 10-year Government bond has increased from 2.39% to 4.09%. Despite listed company earnings holding up relatively well through this rocky trading environment, TINA has turned.

It's important to remember that market valuations are a reflection of expectation rather than status quo. These expectations are heavily influenced by the headwinds that are gathering strength – and chief among these is the availability of labour. Wage inflation has created an employment merry-go-round that is leaving vacancies in sectors integral to our economic growth. Adding to domestic pressure, companies are fighting and losing the global battle for talent against countries that can offer higher wages and arguably better working conditions. Obvious examples here are nurses, doctors and teachers – and the net immigration outlook for 2023, at least for the early part of the year, offers little sign of relief.

But it won’t just be businesses bearing the brunt through next year. Consumers will continue to face cost of living pressures – and even if inflation is tamed, the prices of goods and services are now set at far higher levels than they were a year or two ago. Furthermore, we’re yet to see the full effect of interest rate rises on our home mortgages, as fixed terms expire and 2% or 3% loans get refixed at over 6% or are left to float at closer to 8%.

With lower disposable income circulating, 2023 should see a material economic slowdown and, if the Reserve Bank Governor has his way, potentially even a recession. The glass half-full view on this is that it would at least provide some flex in the labour market. But the unfortunate reality will be businesses downsizing or failing as demand for goods and services falls.

While this may sound alarmingly negative for equity investors, there is succour to be found in the make-up of the NZX. Our listed market is strongly weighted towards sectors such as utilities and telecommunications, which are less labour intensive or subject to changes in discretionary spending habits. This makes it more defensive than the broader economy – plus within the Index there will be further opportunities for the astute investor.

This being an election year, there will be the usual lolly scramble from the Government and promises from the Opposition which will present opportunities for some companies and challenges for others. It will therefore be important for fund managers to follow policies and polling to see what impact the election result will likely have on our listed companies and retain the agility to act accordingly.

Being an active fund manager means we don’t have to buy the market, rather we can invest strategically in companies we believe can benefit from or are less exposed to the prevailing political, social and economic environment. This thinking flows through to positions in our funds, where we are overweight relative to the Index in stocks such as Infratil, Spark, Contact Energy and Channel Infrastructure.

Infratil has a number of defensive investments with growing earnings and values, including healthcare diagnostic imaging, renewable energy and data centres. Spark’s telco and data exposure is defensive through most people seeing mobile communication as an essential service. The same applies to Contact Energy in terms of access to power being a household priority and therefore the first bill to be paid – plus Contact also has future earnings growth through new generation and transport electrification. While for Channel Infrastructure, minimum payments received from its customers for fuel transported from Marsden Point through the pipeline gives it certainty of income. Importantly from our perspective, these payments are increased each year in line with the Producer Price Index to provide revenue growth even through inflationary periods.

Investment decisions also need to reflect activity beyond our borders. Any escalation of the war in Ukraine and/or conflict between China and Taiwan loom large in our thoughts. As these possibilities can’t be priced by the market, having the agility to adjust positioning can make a material difference to investment performance.

So can we go into 2023 with any sense of optimism? Well amid the doom and gloom of 2022, equity markets at least demonstrated an eagerness to do better by rallying on any crumbs of economic comfort hinted at by central banks with regards to limiting rate rises. Therefore any adjustment down of the peak in the OCR through 2023 should be greeted by the equity market moving higher.

When equity markets move, they can move materially in a short period of time – so don’t be surprised by whispers of a TINA comeback tour getting a little louder by late next year.

An edited version of this market outlook has been published on BusinessDesk: https://businessdesk.co.nz/article/opinion/will-it-be-a-tina-turner-or-will-fixed-interest-be-simply-the-best

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