Research analysts with investment services company Forsyth Barr are seeing a potential "return of animal spirits" in the second half of next year - and a number of things, including house prices, could benefit.
In a year ahead equity strategy review, research analysts Andy Bowley, Aaron Ibbotson, Rohan Koreman-Smit and Andrew Harvey-Green have focused on five investment themes for 2023. One of these five is: "Inflections and the return of the animal spirits".
"These inflections have the potential to ignite the animal spirits of the market should they arrive on time and in full," the analysts say.
As well as looking a five investment themes for the year, the analyst have also identified five "inflections" they are looking at that could spark up a recovery in the second half of the year. These are: Inflation, interest rates, GDP, house prices, and government.
For those who've been watching house prices sink all year this year - the bad news is that of the five "inflections", the Forsyth Barr analysts are least confident the housing market one will come to pass.
"House prices are the most difficult inflection to call and the one we have the lowest confidence in 2023," the analysts say.
"The continued difficult backdrop for affordability suggests that house prices could come down a long way still. Our base case is for prices to drift down through the year.
"However, this theme is about the return of animal spirits and if we position ourselves towards the end of 2023, we believe there is a decent probability that an inflection will either have happened, or be anticipated shortly," the analysts say.
In terms of background they say NZ has experienced approximately 12 months of continuously falling house prices, "and in nominal terms we have already seen the biggest drop in 60 years".
"We are already closing in on the longest continuous drop in 40 years (18 months over the GFC).
"If house prices fall until the end of 2023, NZ will also have had the longest nominal drop in house prices since at least the 1960s.
"Assuming a pace of [about] 1% per month and inflation in-line with [the Reserve Bank] RBNZ's forecasts, there will be a peak to trough real house price drop of [about] 30%.
"All in all, this is starting to look like a trough to us. If we and the market are broadly right about interest rates."
On interest rates, the analysts say the wholesale interest rate market is currently 'pricing in' a first RBNZ Official Cash rate cut in October 2023 versus the RBNZ's expectations of mid-2024.
"A rate cut in 2023 should be in the price. However, we believe the first actual rate cut this cycle has the potential to act as a catalyst for both the housing market and the yield heavy part of the equity market."
The analysts say Inflation "is the defining characteristic of this bear market".
"Without an inflection in inflation sometime in 2023 it is difficult to envisage an inflection in any of our other focus areas and, by implication, in the market."
But they say while they note the signs wage inflation is getting entrenched, they point to easing petrol prices, slowing rent growth and easing new house costs.
"Overall, we share the RBNZ's view that CPI is likely to stay high in the December and March quarters, but believe there is a chance of an inflection during the March quarter."
On next year's general election, the analysts say they suspect that "a change of the guard" in Wellington "has the potential to at least temporarily reignite the animal spirits in the business community".
"Whether it lasts will depend on what happens next in Wellington, but more importantly in the country overall."
As stated, higher up, the 'inflections' section of the Forsyth Barr report is just one of five investment themes for 2023. In summary those themes are:
- We expect increased gearing and balance sheet scrutiny, given higher interest rates. We would not be surprised if a few balance sheets need repairing.
- Labour availability and labour costs. We expect continued labour market tightness across most sectors but pockets of easing pressure as the year unfolds.
- The New Zealand macro environment looks uncharacteristically weak relative to the rest of the world. Companies with offshore exposure are preferred.
- The travel recovery is likely to continue with gradually increasing aviation capacity.
- Inflection and the return of animal spirits. We consider five potential positive macro inflections for a 2H23 recovery; namely — inflation, interest rates, GDP, house prices, and government.
The analysts say the RBNZ "has done its best to make sure none of us approach 2023 with any illusions of good times ahead".
"Mortgage rates have hit a 10 year high, inflation is expected to remain stubbornly elevated, and the icing on RBNZ's economic cake is its forecast of four quarters of declining GDP. This bleak backdrop will clearly influence 2023 to a large degree.
"But 2023 is 12 months long, and towards the end of the year we see numerous potential positive inflection points. Less bad is often good enough for the animal spirits to return and a year-end market rally is not off the table."
The analysts say in choosing their five stocks to watch in 2023 they have leaned on companies with the majority of their exposure overseas - (Infratil [IFT], Vulcan Steel [VSL], KMD Brands [KMD]) or with attractive valuations (Oceania Healthcare [OCA], SkyCity [SKC]) "where we think that the bad news is firmly in the price".
"We have done our best to avoid companies that we see as particularly exposed to labour shortages, or have debt concerns."
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