With Asia a prominent export market, New Zealand has suffered from the recent upheavals. Growth predictions have been revised downwards and managers are showing a strong bias towards domestically-orientated stocks.
David Drage, an economist with ANZ Investment Bank in Wellington, says the bank has reduced its growth forecast by 0.5% as a result of Asia, but still expects inflation to pick up. “We expect the recovery in export growth to be more subdued, although with tax cuts this year the domestic economy should see some recovery,” he says.
Drage adds that in such a small open economy, the exchange rate is crucial. “The New Zealand dollar has weakened but short-term rates have risen. We expect the dollar to remain weak before it stabilises around the end of 1998 and onwards.”
Anne West, partner at Cazenove Fund Management in London, says that investors regard New Zealand and Australia as safe haven markets in the Asian context. “We have had a full weighting but because the bulk of New Zealand’s exports, particularly on the pulp/paper side, go to Asia, some parts of the market have been extremely weak. We have been trying to stick to stocks that are exposed to the domestic economy.”
Tim Preston, joint managing director of ANZ Securities in Auckland, believes that this exacerbates a problem that already existed. “For the last two to three years, the domestic sector has outperformed our export sector and this cannot continue. We cannot have the spending side of the economy outperforming the export side for such a period of time. So our view is that we have to be very stock-selective.”
Preston is concerned about the current account deficit, coupled with an already promised increase in social spending just when Asian difficulties could bring an economic downturn. A budget surplus turning into a budget deficit with a current account deficit of more than 8% may not, he thinks, be tolerated by international investors.
One of the ironies of New Zealand’s weak currency, adds West, is that is comes at a time when the major export markets have collapsed.
“Prospects are clearly more muted than they were. While the market is not expensive, parts of it are quite cyclical and we will be revising down. We were looking for something like 13% earnings growth next year but now we are closer to 8%,” she says.
“Our view is one of a very mixed market for the next three–six months which is very stock-selective. Throughout the whole region there will probably be a bit more volatility,” adds Preston.
“It’s not a gloomy picture, it’s just not an exciting one,” West concludes. John Lappin