Stock Takes: What lockdown? Sharemarket shows resilience at Level 4

The sharemarket has been resilient since the announcement of the latest Level 4 Covid-19 lockdown.

The S&P/NZX50 Index has risen by 500 or so points in a little over a week since the lockdown took effect, although the market softened yesterday on the back of a disappointing result from a2 Milk.

The relative strength of the index can’t be put down to any one thing, but clearly investors have dusted off their Level 4 lockdown playbook for an action replay of last year’s rally, which followed a dramatic Covid-driven plunge.

Sam Dickie, senior portfolio manager at Fisher Funds, said it came down to three things.

First, the Reserve Bank’s decision to put off any rate rises because of the latest outbreak was supportive of the local sharemarket because of its sensitivity to rising interest rates.

Second, global markets have been performing well.

And third, a number of idiosyncratic influences have come into play in the local market, which has lagged others so far this year.

Among them was a stronger-than-expected message from the market’s biggest stock, Fisher & Paykel Healthcare, at its annual meeting last week.

There are also some important FTSE index changes in the works, which alters the picture – especially for the index-tracking exchange-traded funds.

Mainfreight – which has had a phenomenal run over the last 12 months – is due to enter the FTSE mid-cap index.

A2 Milk has moved out of the FTSE large-cap index and will go into the mid-cap.

And Serko will into the FTSE’s small-cap index.

Dickie says much of the price action since Level 4 was announced can be put down to “muscle memory” from last year’s lockdown experience.

“From last time we remembered that you buy in a lockdown. You don’t sell,” Dickie said.

As well, the corporates that Fisher Funds follows closely were better prepared this time around.

“When we talked to our 25 or so corporates, they told us ‘we have got this’,” Dickie said.

“It’s business as usual. We have got our playbooks, we have got our stronger balance sheets as a combination of equity raising and stronger internal cashflows.”

A $100 stock?

Freight and logistics company Mainfreight has been one of the strongest performers on the NZX for many years.

In February, the stock traded at just under $68 – more than double its price of two years ago.

In a research report issued in February,Forsyth Barr raised a few eyebrows when it asked whether Mainfreight could soon become a $100 stock because of its “high-quality growth story with an enviable track record”.

At yesterday’s price of $91.91, that forecast no longer seems so outlandish.

Steel and Tube up

While many corporates will be prepared for Covid-19 lockdowns, that’s not to say that it will all be plain sailing.

Steel and Tube reported its annual result this week, and while the demand outlook remains robust, the current lockdown provides some near-term volatility, said brokers Forsyth Barr.

“The impact on Steel and Tube could be significant given the lack of construction activity at Level 4 coupled with its high operating leverage,” it said in a research note.

“While we have lowered our 2022 estimates to reflect a short lockdown, our medium term expectations are largely unchanged and we expect a solid rebound once activity normalises.

“Additionally, Steel and Tube’s cost base has been reset, pricing and margin management is more disciplined, and historically high levels of cash on its balance sheet provide both near-term flexibility and potential capital management.”

Steel and Tube continues to hold historically high levels of cash ($25 million) and is working through its capital management options, and has suggested that a special dividend or a share buyback is most likely.

Forsyth Barr said the underlying demand for Steel and Tube’s products is robust and activity is likely to bounce back quickly.

Summerset outperforms

Among those stocks to have outperformed over the last week has been retirement village company, Summerset, which this week reported a 68 per cent lift in its first-half underlying net profit to $75.5m in the six months to June 30.

Chief executive Scott Scoullar said the current lockdown was a reminder that New Zealand was still operating in an environment dominated by Covid-19. Shares in Summerset have rallied by $2.00 or 14 per cent to $15.20 since the result.

World markets grow

The world’s stock markets continue to record sustained growth after reaching historical lows amid the pandemic, financial publisher Finbold said in a report.

The growth is highlighted by the movement in market capitalisation on the leading exchanges.

According to data acquired by Finbold, the 10 largest stock exchanges globally cumulatively grew by 15.43 per cent or US$12.12 trillion ($17.3t) in market capitalisation between January and June 2021.

At the start of the year, the total market cap stood at US$78.54t, surging to US$90.66t by the end of 2021’s first half.

American-based exchanges remained dominant, with the New York Stock Exchange holding pole position.

In the period under review, the exchange’s market cap surged from US$21.36t to US$25.30t.

Nasdaq-US ranked second, with its market cap growing 14.32 per cent to US$22.11t.

Hong Kong Exchanges and Clearing’s market cap grew from US$6.47t to US$6.80t.

The Shanghai Stock Exchange recorded growth of 17.08 per cent from US$6.50t to US$7.61t.

And the Japan Exchange Group’s market cap grew by 5.35 per cent while Euronext had the highest growth rate at 32.17 per cent, from US$4.88t to US$6.45t.

The report highlights the drivers behind the growth in market capitalisation for the exchanges during the first six months of the year.

“In general, the inflow into the stock exchanges highlights the recovering economy due to the rollout of the coronavirus vaccines.

“The vaccination has been wide scale in most developed markets that host the exchanges. Sectors like air travel and energy that were crippled by the pandemic are also recovering, joining tech stocks that have mostly retained historical highs since last year.”

“Furthermore, support from high corporate confidence levels and an extended great monetary and fiscal stimulus have played a vital role in the stock market’s growth,” it said.

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