Forsyth Barr sees a light at the end of the tunnel after ‘worst year on record’ for NZX-listed companies

New Zealand’s benchmark stock index closed on Wednesday at virtually the same level it was at before the pandemic struck more than four years ago.

It has climbed just 1% in the past year and is unchanged from the same period two years ago. 

Although there have been highs and lows, it has generally been a tough couple of years to be an investor in NZ’s equity market.

The stocks which make up the S&P/NZX 50 index have underperformed a global index of stocks by roughly 40% since 2020, the worst result since the market crash in 1987. 

Companies listed on the stock exchange report on their earnings every six months, and the latest round has been something of a shocker. 

In a note to clients, analysts at Forsyth Barr said aggregated net profit was down roughly 7% on last year — making it the worst on record. But, they also see a light at the end of the tunnel. 

“Despite all the gloomy headline numbers, we argue that we are at the beginning of the end of the downturn,” they wrote. 

Three companies with close links to overall economic activity—Vulcan Steel, Fletcher Building, and Spark—all said the second half of their financial years were better than the first. 

Spark, a telecommunications firm, can be considered a ‘’bellwether’ stock that moves in sync with the wider economy. It said there were emerging signs of economic improvement. 

Forsyth Barr said analysts had been focused on how rising costs were hurting profit margins during the past few earnings seasons, with inflation the “topic de jour”. 

“But one of our key takeaways from this earnings season is that corporates have got a handle on the inflationary impulse, we actually saw modestly reduced expectations for costs”.

Poor earnings were now being driven by “old fashioned” revenue downgrades — which the analysts counterintuitively described as being “a small win” for predictability.

“When the economy recovers and revenues start to be upgraded, odds are that we will see substantial earnings growth, certainly for the more economically sensitive names”.

Recessionary conditions

Jason Wong, an economist at BNZ, said the commentary from NZX-listed companies was overwhelmingly negative and consistent with recessionary conditions. 

“There were some green shoots in activity noted, although it is difficult to judge whether a genuine recovery in activity has begun or it was simply a case of the worst being over”. 

Economically sensitive stocks in the construction, retail, and primary sectors appeared to have been hardest hit. Wong said this was no surprise given current conditions.

Statistics New Zealand will release Gross Domestic Product data for the final quarter of 2023 next week and it is expected to show virtually no growth across the entire calendar year. 

Strong population growth means actual economic activity per person has been falling fast. 

Sabrina Delgado, an economist at Kiwibank, said high interest rates were engineering this outcome and growth would be slow until the Reserve Bank eased its policy settings. 

“As the interest rate settings are relaxed, confidence among households and businesses should build. The economy should regain momentum into [2025],” she said. 

Markets are forward looking and so GDP data, which dates back to October last year, will be largely irrelevant for investor and corporate decision making.

But a number of companies are looking at forecasts which suggest rates will be cut towards the end of 2024 and are planning for more demand then. 

For example, Vulcan Steel told investors trading volumes had been weak but were expected to begin recovering in the “second or third quarter” of the calendar year.

Media company NZME said its operating revenue was down 5% due to economic conditions and a weaker real estate market. But things had begun to pick up in February with business and consumer confidence trending upwards.