New Zealand Quarterly Economic Check-up: Mildly Positive With Attractive Alpha Equities

by: Econ Grapher

New Zealand just saw the release of two key economic statistics: its current account and Gross Domestic Product. While both data points were mildy positive, due consideration needs to placed on the detail in order to understand the outlook and implications for investing. On GDP, the New Zealand economy grew 0.2% q/q in the December 2010 quarter (-0.2% 3Q10), placing it up 0.8% year on year (1.5% 3Q10). Meanwhile the current account came in as -2.3% of GDP (from -2.2% in 3Q2010).

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Digging into the GDP statistics, the strongest sectors on a quarterly basis were fishing, forestry and mining, manufacturing, construction, and personal and community services. While the worst performing sectors were wholesale trade, retail, accommodation and restaurants, and utilities. So it was basically the primary sectors doing well, with the consumer sector still struggling.

So the consumer (and for context, New Zealand had a similar - in nature, but not in magnitude as NZ banks and lending practices were more vanilla - situation to that of the United States of America, i.e. a large rise in house prices, over-leveraging, etc.) is continuing to prioritize paying down debt. While negative for growth in the short term, the deleveraging should be a positive for sustainable future growth.

Breaking the GDP results out by components, on a quarterly basis net exports were negative, inventories were positive, gross fixed capital formation was positive - but residential buildings were still significantly negative, and final consumption expenditure was marginally positive, with the government contributing twice as much as private expenditure.

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Looking at the current account there were a few standouts in the December results. On a quarterly basis the seasonally adjusted balance turned from a decent positive back to negative. This was driven by a reversal in the transfers/flows with lumpy cash flows relating to insurance and reinsurance payments (repatriation of investment funds) related to the earthquake, while the trade balance was down also - but still positive. By and large though, New Zealand tends to run a structural current account deficit due to the ownership structure of its banking sector.

However New Zealand has also tended to run relatively deep trade deficits due to dependence on exports for technology goods, energy, etc. This is a potential area of opportunity and goes to the whole issue of global imbalances. It's the old line that deficit nations need to export their way out of recession and save more, while surplus nations need to consume more and lower savings. New Zealand would certainly benefit from a more vibrant export sector, and some headway is being made on that front. But for now, the improvement in the trade balance is largely down to lower import demand and high agricultural commodity prices.

In terms of the outlook for the New Zealand economy, the effects of the Christchurch earthquake are taking their toll in the short term. It is likely that the rebuilding effort will begin to add to GDP, starting late this year and in full force in 2012. So while the New Zealand economy has been struggling, there are conditions present that should foster decent growth through the later part of the year. For instance, monetary policy is very stimulatory - with the RBNZ recently dropping rates in response to the earthquake. In addition, the Rugby World Cup will also add tourism revenues and boost the consumer sector. High agricultural commodities will boost the primary exporting sector, particularly dairy.

So the economic outlook is, on balance, mildly positive. As for financial markets, New Zealand equities remain an attractive alpha hunting ground, with most decent managers being able to pick up about 5% alpha. Broadly speaking, valuations are probably relatively less attractive than some other markets, but dividend yields do tend to be higher. Theres also the prospect of state owned companies being partially listed, which may boost the market. For those without direct market access to the NZX, options include Australian dual listed companies, ADRs, or the U.S. listed ETF, (NYSEARCA:ENZL).

On the currency, the risks are still weighted toward the downside, with the NZD still looking relatively overvalued, particularly on a PPP basis. However in the short term, commodity prices are likely to continue to underpin the Kiwi. Likewise, monetary policy will likely begin to be tightened later this year and next year, which will also provide some short term support. In the medium to long term, however, risk is for a fall in the NZDUSD down to about the 0.60 level. BNZ can provide a means of gaining NZD exposure.

Data Source: Statistics NZ

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.