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In searching for geographical diversity for my portfolio, I've had my eye on the iShares MSCI New Zealand ETF (ENZL) for over a month now. I had heard rumors of how New Zealand was not as deeply correlated to Europe or other Asian economic woes as the emerging markets or most other developed markets, so I felt compelled to research New Zealand further. I want to present the findings of my economic research into New Zealand and give my opinion of buy, wait, or sell.

New Zealand's Niche

New Zealand has some distinct differences in their industrial operations, which has carved their niche in the world due to their economic base and geographical location, specifically their GDP components, commodity exports, and trade partnerships.

Let's first look at their GDP components, according to New Zealand Now's Economic Overview:

GDP Component

NZD (Millions)

% of Total

Finance, Insurance & Business Services

39,235

28.80

Personal & Community Services

16,552

12.20

Manufacturing

16,429

12.10

Transport & Communication

14,184

10.40

Retail, Accommodation, Restaurants

10,082

7.40

Wholesale Trade

9,947

7.30

Agriculture

6,939

5.10

Government Administration & Defence

6,794

5.00

Construction

5,443

4.00

Fishing, Forestry, Mining

3,359

2.50

Electricity Gas & Water

2,680

2.00

Gross Domestic Product

136,137

100.00

Now let's look at their top twenty commodity exports from the same source for the year ending December 31, 2012:

Commodity

NZD (Millions)

Milk Powder, butter, and cheese

12,428

Meat and edible offal

5,167

Logs, wood and wood articles

3,160

Crude Oil

1,790

Mechanical machinery and equipment

1,716

Fruit

1,563

Fish, crustaceans and molluscs

1,382

Wine

1,218

Electrical machinery and equipment

1,119

Aluminum and aluminum articles

1,042

Casein and caseinates

890

Iron and steel and articles

874

Preparation of cereals, flour and starch

917

Precious metals, jewelry and coins

807

Miscellaneous edible preparations

747

Optical, medical, and measuring equipment

721

Wool

717

Wood pulp and waste paper

589

Raw hides, skins, and leather

567

Textiles and textile articles

560

And finally, let's look at the top ten trading partners of New Zealand, also from the same source:

Country

Exports NZD (Millions)

Imports NZD (Millions)

Total Trade NZD (Million)

Australia

10,848

7,369

18,217

China

5,887

7,439

13,326

United States

3,997

5,026

9,023

Japan

3,441

2,921

6,362

Republic of Korea

1,675

1,454

3,129

Singapore

813

2,163

2,976

Germany

775

1,994

2,769

Malaysia

875

1,478

2,353

Thailand

732

1,330

2,062

Total Trade

47,702

46,896

94,598

New Zealand Economic Indicators

The New Zealand Treasury issued their Monthly Economic Indicators June 2013 report which analyzed market and economic factors. The report cites a severe drought which has affected their agricultural production. Because of this drought, growth is expected to be reduced by about 0.7 percent in 2013, reducing the expected GDP growth to 0.3 percentage points.

GDP Production by Industry

Percentage Point

Agriculture, Forestry and Fishing

-0.3

Mining

0.1

Manufacturing

0

Electricity, Gas, Water & Waste Services

-0.1

Construction

0.3

Prof, Scientific, Tech, Admin, & Support Services

0.4

Retail Trade

0.1

Other Industries

-0.2

GDP

0.3

*Source: New Zealand Monthly Economic Indicators June 2013

Expenditure on GDP grew 0.3 percent in this quarter. Household consumption and residential investment spending grew by 0.2 and 0.4 percent, respectively. Excluding residential investment, investment fell in the quarter, reducing growth by 0.3 percentage points due to decreased plant and machinery investment. Goods and services volumes rose 2.5 percent, offsetting a 2.3 percent increase in the imports of goods and services.

The current account deficit fell to 4.8 percent of GDP from 5.0 percent GDP in December 2012. This was attributed to a larger surplus of goods. The income deficit, the largest component of the current account deficit, continued to benefit from lower interest outflows. Dividend income earned by foreign portfolio investors also fell. Decreasing profits from New Zealand companies overseas offset the lower outflows, keeping the income balance flat.

Net international liabilities fell to 69.3 percent of GDP from 71.4 percent of GDP in December 2012. Rising overseas share prices and an increase in purchases of overseas debt securities contributed to a $3B rise in New Zealand's overseas assets.

The iShares MSCI New Zealand Capped ETF

Given the information just presented to you about New Zealand and its economy, the ENZL is an good idea if you want to invest in a jurisdiction which has good economic fundamentals and limited exposure to the world's economic problems. The ENZL currently has $159M in total net assets, investing in 24 different equities. ENZL charges an expense ratio of 50 basis points and pays a 4.95% dividend yield.

The sector breakdown is as follows: materials (17.20%); consumer discretionary (16.01%); industrials (15.62%); telecommunications (13.48%); health care (12.94%); financials (9.67%); utilities (8.85%); information technology (4.80%); energy (1.33%); S-T securities (0.04%); and other (0.06%). The top ten holdings account for 67.37% of the fund's holdings.

Top Ten Holdings

  • Fletcher Building Ltd. (OTC:FRCEF) - 14.98%
  • Telecom Corp of New Zealand (NZTCY.OB) - 10.19%
  • Auckland International Airport Ltd. (OTC:ACKDF) - 7.89%
  • Ryman Healthcare Ltd. (OTCPK:RYHTY) - 6.11%
  • Skycity Entertainment Group - 5.93%
  • Fisher & Paykel Healthcare (OTCPK:FSPKF) - 4.93%
  • Contact Energy Ltd. (OTC:COENF) - 4.65%
  • Trade Me Ltd. (TME) - 4.34%
  • Infratil Ltd. (IFT) - 4.19%
  • Sky Network Television Ltd. (OTC:SKKTY) - 4.15%

ENZL Performance

  • 52-week range of 28.56 to 39.66
  • Year-to-date market return of -0.962%
  • 1-year total return of 21.45%

*Source: Yahoo! Finance

Conclusion

Given all information presented here, I feel that the ENZL is a good investment to give you some geographical diversification. I like the economic fundamentals, overall performance, asset allocation, and the current price. If you're concerned about the GDP decline due to the severe drought, I wouldn't let that sway my opinion because it isn't the result of an economic shakedown. Overall, I'd go long the ENZL.

Source: Looking For A Reason To Invest In New Zealand?