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Market Recap for 2018 & What to Expect in 2019

Whilst headlines provide the predictable doom and gloom we can see from the table below that the NZ market is holding up quite well in the face of an international sell down. HHG continues to see long term value in the NZ market and further afield.

Read more below, including HHG's top 5 picks for 2019.
Anyone following the market closely in 2018 will be well aware of how volatile it has been. The market hit all-time highs in September before major corrections which saw the markets retrace much of those gains. You can see from the tables above that the NZ market performed relatively well during this period falling back only 6% from its highs. The NZX50 cuts a fairly lonely figure being up 4.92% over the course for 2018. 

There are a multitude of reasons for this, but one obvious factor is the overall lack of high risk growth stocks on the NZ market. The NZ market as a whole is dominated by reasonably defensive companies paying sustainable dividend yields. This does not mean the NZ market is without its own risks.

Internationally, the narrative of 2018 was rising interest rates in the US, coupled with tensions around trade. NZ has been relatively immune to any rise in interest rates, with our reserve bank indicating during the year that the next move could still be down in 2019. This has helped maintain the attractiveness of NZ companies (i.e. the dividend yield is still quite attractive relative to alternative investment options). 

Many of the NZX50 companies are also relatively NZ focused in nature, meaning that earnings are not directly impacted by the trade tensions. Of course, if these trade tensions start to have a major impact on international trade and GDP then this will inevitably flow through to company earnings.

Looking into 2019, the same risks to the market remain. Much talk in the investment community has been around the yield curve, and the potential for it to become inverted in 2019. An inverted yield curve is a harbinger of an economic recession as it indicates that investors are expecting interest rates to drop in the future, and are therefore happy to accept lower rates on long term bonds. In a normal scenario, the yield curve slopes from lower interest rates on short term deposits to higher interest rates on long term deposits (the reflects the fact that long term bonds are exposed to more risk as time creates more opportunity for the economic environment to change).

Currently the yield curve is flattening. An inversion is a major risk to the market in 2019. 

That’s not to say it’s all doom and gloom in the markets. Low interest rates still provide plenty of support, and the individual companies that make up the respective index are (generally speaking) producing the goods. The yield on offer is attractive, and most companies are achieving earnings growth.

The yield on corporate fixed interest can also be quite attractive. Contact your adviser to express your interest in upcoming bonds issues. Trustpower have recently indicated that they will issue a new bond. 

We at Hamilton Hindin Greene see good value in parts of the market. Our top 5 picks of the year are below. You should talk to your adviser before including these in your portfolio. 

You should also talk to your adviser to ensure your portfolio is suitable for your appetite for risk. If you haven’t completed a financial and risk profile recently, then we strongly recommend that you contact your adviser to do so. The New Year is a good time to reassess your finances and position yourself for the year ahead. 

Given that we are in a period of potentially heightened risk, now is a great time to ensure your portfolio is well balanced to ride out whatever the market throws at it.

A2 Milk 
While A2 Milk's highest-growth days are behind it, we still expect solid future gains, with market share opportunities in Chinese infant formula, U.S. fresh milk, and global follow-on dairy products supporting our outlook for 18.5% annual earnings growth over the next decade. And with minimal capital investment needs, A2 is set to enjoy stellar returns on invested capital and strong free cash flow.

Fisher & Paykel Healthcare
Fisher & Paykel are another company looking at double digit earnings growth going forward. Operating in the relatively defensive healthcare sector, Fisher & Paykel have carved out a solid niche in the respiratory care market. A steady rise in premium products and cost savings from moving a greater portion of consumables production to Mexico will likely deliver higher gross margins.

Infratil held up well in the recent market pull back due to their strong asset base. The company still trades at a significant discount to their underlying net asset backing. These assets include Trustpower ($1.95/share – 28.8% of Infratil’s Asset Value), Wellington Airport ($1.35  – 20.0%), Canberra Data Centres ($1.06 – 15.7%), Tilt Renewables ($0.75 – 11.1%), Retire Australia ($0.57 – 8.4%), NZ Bus ($0.30 – 4.5%), Longroad Energy ($0.29 – 4.2%) Other Assets ($0.49 – 7.2%). Debt and the present value of the management contract reduce the overall assets from $6.77 to the $4.75 (compared to a currecnt market price of $3.65).

Mainfreight Limited is a global Supply Chain Logistics provider, specializing in handling of freight that is Less Than Container Load. Mainfreight offers a full supply chain solution from managed warehousing and international and domestic freight forwarding. The company has produced solid eanings growth over the years and is expected to maintain this momentum in 2019. 

Oceania Healthcare
Our preference in the aged care sector at the moment is Oceania as they are less leveraged to the property market due to the mix if assets they possess. Oceania have the highest number of care beds as a proportion of their overall asset base (63% vs. an industry average of approx. 30%) which gives the company more consistent cash flows (as opposed to relying on property development and turnover). Having said that, Oceania has a strategy to improve asset density and yield through brownfield development. We believe the combination of an attractive development pipeline (offering mix improvement) and a small in-place retirement asset base should deliver strong growth in gross occupancy advances over the next five years.

Disclaimer: Hamilton Hindin Greene did not take into account the investment objectives, financial situation or particular needs of any particular person in the preparation of this publication. Accordingly, before making any investment decision Hamilton Hindin Greene recommends that you seek professional assistance from your investment adviser.

This is general information only. For personalised investment advice please contact your investment adviser on 0800 104050

This publication may not be reproduced or further distributed or published without the express prior approval of Hamilton Hindin Greene Limited. While this publication is based on information from sources which Hamilton Hindin Greene considers reliable, its accuracy and completeness cannot be guaranteed. Hamilton Hindin Greene, its directors and employees, do not accept liability for the results of any actions taken or not taken upon the basis of information in this publication, or for any negligent mis-statements, errors or omissions. Some information included in this publication is of an historical nature and may have been superseded. Historical performance does not guarantee future performance. Those acting upon information and recommendations do so entirely at their own risk. Hamilton Hindin Greene’s directors and employees may, from time to time, have a financial interest in respect of some or all of the matters discussed. 
Filed under General \ Grant Davies
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