INSIGHTS

For many years the New Zealand Herald has asked the local sharebroking and wealth management firms to nominate five NZX companies they think will do well in the year ahead.

Astute investors will appreciate that any sensibly constructed portfolio will contain more than five stocks, and certainly won’t be limited to one asset class or region.

Nonetheless, the tradition is an interesting way to gain some insights into what various organisations are expecting in the year ahead.

In this post I’ll outline the five stocks our analysts and investment team landed on for 2023, and how they fit with our broader view of the economic and market outlook.

But first, let’s recap how we performed last year.

After finishing in first and third place in 2020 and 2021 respectively, we were right in the middle of the pack for 2022. Of the seven participants we came in fourth with a return of -4.8 per cent. 

This compares well with the 9.1 per cent decline from the NZX 50 during the same period. Solid, if unspectacular. It was indeed a challenging year for the local market, with the index posting its biggest decline since 2008, even though it held up better than many other markets, such as the US. Our five companies in 2022 were:

1. Contact Energy (+7.5%)
2. EBOS Group (+16.7%)
3. Fletcher Building (-23.6%)
4. Pushpay (+4.9%)
5. Summerset (-29.3%)

The exercise ran for 12 months, although not the calendar year. That means those returns won’t quite match the figures in the table above, which are as at 31 December 2022.

Contact Energy and EBOS Group performed well, as we have come to expect from these high-quality defensive businesses.

Pushpay attracted some takeover interest from offshore, which saw it become a target during the year. This boosted the share price, in contrast to most high-growth technology companies which have suffered against a backdrop of rising interest rates.

The weak links in our group were Fletcher Building and Summerset, both of which proved more volatile than expected as economic uncertainty has risen, and with the housing market under severe pressure.

Our approach to equity investing doesn’t always lend itself to coming first in a contest like this. 
To come out on top during a period as brief as 12 months, one often needs to be of a short-term trading mindset. As long-term investors, this isn’t something we specialise in.

Investing in quality companies is a key tenet of our investment philosophy, across all regions. For us, this means looking for businesses that are resilient and defensive, with sustainable (and growing) dividend streams.

Our strategy of minimising volatility, generating income and limiting downside during difficult has historically delivered consistent, steady returns over time, rather than short-term gains.

We have full confidence in our approach as a long-term generator of wealth, as evidenced by our track record over more than two decades.

Looking ahead to 2023

Our five picks for the coming 12 months are:

1. Chorus
2. EBOS Group
3. Meridian Energy
4. Spark
5. Tourism Holdings

We expect 2023 to be another challenging year.

The peak of inflation peak will soon be behind us, and the last Official Cash Rate hike is within sight.

We suspect this will please financial markets, although the focus will quickly shift to the impact all of the recent monetary policy tightening will have on economic activity, as well as corporate earnings.

We’re likely to see a slowdown in the economy, as well as some upward pressure on unemployment. This will make for a tougher business environment, while the housing market will continue drifting lower, adding to the cautious sentiment and crimping consumer spending.

This backdrop points us toward companies that will be more insulated than most during a tough economic period, and possibly a recession.

Meridian Energy, Chorus and Spark provide essential services, so customer demand will remain solid in the face of a weaker economy. Healthcare is also a sector that traditionally performs well during difficult periods, and EBOS is a very good exposure to this sector.

We have chosen companies that are well-capitalised with strong cash flows, which won't get into trouble because of high debt levels in the face of higher borrowing costs.

Although inflation will come down from here, it will remain high. This means it is also important to favour companies with strong pricing power, as they can raise prices to keep up with increasing costs.

Tourism Holdings is the outlier in this group, with the other four being defensive, resilient, income generating shares. While it operates in an industry tied to the fortunes of the economic cycle, we see positive signs ahead.

It offers an excellent exposure to the recovering travel sector, and should tourism keep improving as we expect, the company is well placed to capitalise on this. We also believe the Apollo merger is a positive for the business.

On a more encouraging note, we think its important investors remember that financial markets look forward.

For the economy, the worst is almost certainly ahead of us, with this year set to be a more difficult one than 2022.

However, it might be a case of ‘weaker economy, better markets’.

The NZX 50 peaked in January 2021, almost two years ago, and it has fallen about 15 per cent since then.

The economic challenges we are facing aren't lost on investors, which is why we've already seen a decent fall and a lengthy period of poor performance.

If the economy does fall into a slump in the middle of this year, the sharemarket will quickly turn its attention to the recovery beyond that.

While there is likely to be volatility ahead, there's every chance things are on the improve during the second half of the year.

It's important to be cautious given all the uncertainties around, but investors also need to be willing to stay invested and to take opportunities when they present themselves.