NZX 50 books worst quarter since 2012, as global fears weigh on stocks

New Zealand stocks booked their worst quarter since June 2012, retreating for a second quarter, as a drop in global commodity prices and fears about emerging economies weighed on equities.

The NZX 50 Index declined 3.5% in the three months to September 30, adding to the June quarter's 1.9% decline, when it snapped 11 consecutive months of quarterly gains.

"Things don't go up in a straight line for ever and a day, and you'd have to say we've had a very impressive performance on the local market for a longer period of time," Grant Williamson, director at Hamilton Hindin Greene said. "We're now going through one of those difficult periods that see investors give a little bit back."

Trading in the quarter was marked by volatile markets, with the VIX Index, known as Wall Street's 'fear gauge,' climbing to a four-year high in August, as a large correction in Chinese equities spooked global markets, already concerned the world's second-biggest economy was slowing. Falling commodity prices, particularly iron ore and oil, weighed on equity markets too.

"It's been a pretty rocky period for international markets, so you have to say that the NZX did relatively well," said Brian Gaynor, executive director at Milford Asset Management. "Our market did much better than other markets in the quarter, and it's mainly to do with the mix. We've got more conservative, defensive companies, whereas in other countries they have bigger exposure to mining stocks and energy companies."

Gaynor points to the 9.3% percent drop for MSCI World Index, which tracks developed countries' markets including New Zealand, which compares to a 20% percent slide in MSCI Emerging Markets Index.

"It's wider than just China, it's emerging economies," like Russia, Brazil and African nations, Mr Gaynor said. "Unlike most of those countries, China is not an exporter of commodity products but is an importer. A lot of the other countries are exporters of commodity products, and commodity prices have fallen, so it is wider than just China.

"We've got a two-fold world at the moment. We've got the emerging countries, which are really struggling but we've got the United States doing particularly well and Europe picking up quite strongly," Mr Gaynor said.

Australia's S&P/ASX 200 Index, which contains several large iron ore companies, dropped 8% percent in the period, accelerating from the previous quarter's 7.3% decline, to record its worst quarterly performance since the European debt crisis in 2011. Wall Street's S&P 200 Index fell 7.9%, its worst quarter in four years, while the Shanghai Composite Index dropped about 25%.

Last month traders were divided on whether the US Federal Reserve would move to lift interest rates from zero, marking the first hike in nearly a decade. Improving US economic data pointed to an increase but the central bank kept interest rates on hold, citing turmoil in global financial markets as threatening the world's biggest economy, and lowering the track of future hikes.

"People were speculating over two events. One was 'would the Fed be tightening in late September?'" said Rickey Ward, head of New Zealand equities at JB Were NZ. "Then you had China come out and start to show signs of a slowdown and that created market volatility. So, it was a bet on (whether) the data out of China (is) a fair reflection. Would they go into recession and would you need some more time or will the Fed push that to the side, because they weren't looking at that originally, and tighten."

On the local market, reporting season during August was somewhat overshadowed by the offshore turmoil but for the most part met analysts' expectations, Mr Ward said.

Ebos Group was the best performer in the quarter, advancing 22% in the period, to trade at a record $12.51 per share in late September. In August, the health and animal care products company posted a 15% percent gain in full-year profit to $105.9 million, led by increased sales and an improved margin from its Australian healthcare businesses.

"It was pretty flat for a reasonable period of time, then it comes in with a good result and people realise 'oh it's still got legs in it'," Mr Gaynor said. "There was concern that the Australian acquisition would see its growth flatten out but it's proving to operate quite well in Australia."

Sky Network Television was the worst performer, down 25% percent in the period, touching a nearly three-year low of $4.58 in August. The dominant pay-TV provider faces earnings erosion as more viewers turn to online streaming services to get their content.

"Sky TV has been built around sports. Sports and movies are its two major content," Mr Gaynor said. "When we look back after the Rugby World Cup is over, you do see a lot of churn" as people cancelled subscriptions after the competition.

Looking ahead, Mr Gaynor said Milford was taking a defensive, cautious stand and holding higher levels of cash as offshore volatility continues to drive the local stock exchange.

(BusinessDesk)