Interest rate rises loom on horizon

MATT NIPPERT
Last updated 05:00 23/12/2013

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If this year was characterised by large floats and big Xero-shaped surprises, brokers are saying 2014 is shaping up as a choppy year of political uncertainty and interest rate hikes.

The general election next year is the most obvious cloud on the horizon, with the likelihood of a close race making the outcome uncertain.

Rob Bode, head of research at First NZ Capital, says the result could be significant for the electricity and telecommunication sectors.

"Together with the reasonably sharp divergence in policies between a National-led or a Labour-Green coalition, it suggests that the political risk premium for domestic equities may increase," Bode says.

The likelihood of interest rate rises - Bode picked the Reserve Bank lifting the Official Cash Rate by as much as 100 basis points next year - added a further note of caution and meant it was unlikely the gains this year by the NZX would be matched in the next.

Bernard Doyle, NZ Strategist at JBWere, seconded these two risks, but notes opportunities in overseas markets are picking up and an asset reallocation may be in order.

"We are recommending clients hold a lower portion of New Zealand equities in favour of global stocks," he says.

Doyle notes that a glut of large floats, particularly large energy companies listed under the Government's Mixed Ownership Model programme, failed to saturate the NZX50, which increased a respectable 18 per cent during the past year.

Despite the known uncertainties of elections and Reserve Bank ruminations, next year will undoubtedly throw up surprises.

Of all the brokers spoken to this time last year, none picked Xero, the accounting software outfit that has gone from a mid-sized startup to NZX titan during the past 12 months.

This miss, of a stock that increased in value five-fold in the past year, and all brokers picking at least one that shed value over the same period, shows that risk is the ever-present partner of share ownership.

"Undoubtedly the major surprise for us in 2013 was the way the market embraced the progress of Xero," Bode says.

Brad Gordon, a senior investment adviser at Macquarie Private Wealth, says Xero's move up the NZX ranks, peaking with a market cap of $5 billion, and Chorus' halving in value due to uncertainty over its policing by the Commerce Commission, highlighed a divergence between companies with global growth ambitions and those stuck with unpredictable regulators.

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