OUR FIVE PICKS FOR 2022
Mark Lister, 10 January 2022
For many years the New Zealand Herald has asked the major 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 much 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 investment teams are expecting in the year ahead. Here, we outline the five stocks we have selected for 2022.
Companies which were part of the broader conversation also deserve a notable mention. These include Freightways, Mainfreight, Mercury NZ, Ryman Healthcare, Spark and Turners, all of which we view positively and believe are well positioned.
But first, how did we do in 2021?
We followed up last year’s first place with another podium finish in 2021. Of the seven participants we came in third with a return of 14.9 per cent. This compares extremely well with the 0.9 per cent return from the NZX 50 during the period of the contest. It was a challenging year for the local market, with the index posting its worst return since 2011. Our five companies in 2021 were:
- EBOS Group (+37.6%)
- Fisher & Paykel Healthcare (-2.9%)
- Mercury NZ(+4.6%)
- Mainfreight (+48.6%)
- Ryman Healthcare (-13.5%)
These five companies are all high quality, blue chip businesses. Our clients will be very familiar with all of these, and many of them will hold most (if not all) of these in their portfolios.
Fisher & Paykel Healthcare had a lacklustre year, after performing extremely well in 2020 during the worst of the pandemic. This wasn’t a complete surprise to us, as we had picked it as a partial hedge to another unexpected bout of COVID-related hospitalisations. It remains an excellent company with a very bright future, despite the path of the pandemic from here making for an uncertain short-term outlook.
Our other laggard was Ryman Healthcare, which is another world class New Zealand business that has been a stalwart of our portfolios for years, if not decades. Ryman has faced some challenges over the past 12 months, not only due to the pandemic but also due to rising expectations of a housing slowdown, and changes to its management team. Despite a poor performance in 2021, we remain very comfortable with Ryman.
Our approach to 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, that isn’t our specialty.
Minimising volatility, focusing on sustainable (and growing) dividends, and sticking to quality are key tenets of our investment philosophy, and this 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 the past two decades.
Looking ahead to 2022
We expect the coming year to be a little tougher for investors, so we're preparing for higher volatility, more modest returns (world shares have returned 19.0 per cent in 2021, well above the 30-year average of 8.4 per cent, including dividends), and more divergence between winners and losers.
The easy part of the post-pandemic recovery is behind us, and the tailwind of easy monetary policy is becoming a headwind as central banks look to reduce stimulus and raise policy interest rates. This will likely be a dominant theme in 2022, with inflation set to remain higher than policymakers would like, and for longer.
We are also keeping an eye on geopolitical issues. Since former US President Donald Trump left office, these risks haven't been talked about nearly as much, although they haven't gone away. We expect ongoing tension between the US and China, as well as the US and Russia. Inflation and interest rates are getting all the attention, but geopolitical risks still exist and shouldn’t be ignored.
On a brighter note, we believe New Zealand’s economic growth will still be impressive in 2022. Unemployment is very low, prices for our key export commodities are strong and activity is buoyant in many regions. This is a positive environment for businesses, although earnings growth will be in a tug of war with rising interest rates, and the latter will no doubt impact market sentiment and valuations.
It is also comforting to know that markets are fully expecting a string of hikes in the Official Cash Rate (OCR) during 2022, to the point where they might’ve even gotten a little ahead of themselves.
At present, market pricing points to just shy of 200 basis points of OCR hikes in the next 24 months, which is eight 0.25 per cent increases. It's entirely possible we encounter a hiccup of some sort before then, or that higher mortgage rates start to bite and take some heat out of the economy, limiting the need for quite as much action as some expect.
Another point which could be in favour of the glass half full view is the fact that the local sharemarket was such a laggard in 2021, and that it remains somewhat unloved. The NZX 50 index fell 0.4 per cent in 2021, in stark contrast to US shares which rallied 26.9 per cent, the European market which gained 25.4 per cent and the Australian ASX 200 which added 17.7 per cent.
New Zealand shares lagged the rest of the world by almost 20 per cent in 2021, which is the widest performance gap since 1998. It suggests there isn’t much enthusiasm for our market at present, and provides some potential for it to prove more resilient than people think.
The five companies we selected for 2022 are:
- Contact Energy
- EBOS Group
- Fletcher Building
It never hurts to own an electricity company. They are very defensive - almost recession proof - and they offer very stable cash flows and dividend yields. We think the sector has more pricing power than some believe, which means it’ll be able to maintain profit margins in the face of higher inflation, in contrast to some other sectors.
The Tauhara geothermal development is a good opportunity for Contact, while the strategic review of its thermal assets could also be interesting.
EBOS is one of those businesses that simply delivers year in, year out, so it never looks out of place in a list like this. It has a very solid track record of earnings growth over a long period of time, and we think the structural demand story for healthcare products is strong, supported by an ageing population.
Pet ownership also continues to increase and will provide further opportunities, which will benefit the animal care parts of the group, such as Masterpet.
Many of the stars have started to align for Fletcher Building, and the company has moved on from its past mistakes with a much-improved management team in place. We aren't too worried about any negative impact from the latest lockdowns, given construction activity is still strong and overall demand is likely to remain robust, even in the face of rising interest rates.
The company is reasonably priced, and businesses that are more cyclical in nature can often perform well against a backdrop of higher inflation and rising interest rates.
Pushpay has been sold off heavily since its last result, and we think this is a little overdone. The company has had a management reshuffle, which is always disruptive, and trading conditions have been on the soft side. However, Pushpay is still a beneficiary of the world's digital transformation, which we expect to be a long-term structural trend. With the business focused on the North American market,
Pushpay is a beneficiary of a buoyant US economy, as well as a strong US dollar. The greenback could remain resilient in 2022 as the Federal Reserve in the US moves to rein in its monetary stimulus over the coming months, and follows this up with interest rate hikes.
Demographic trends remain very favourable for businesses like Summerset. The backdrop of an aging population, increasing demand for healthcare services and a shortage of suitable housing providing a supportive backdrop. Summerset produced some great results in 2021, and we expect the company to have come through the recent lockdowns in very good shape.
We like the long-term growth story, especially what Summerset is doing across the Tasman, and while we expect the heat to come out of the housing market as interest rates rise, we struggle to see prices declining by much. We think the housing market is more likely to go sideways than down, which means Summerset is poised to continue performing well as demand for its services remains high.
This article was also published in the New Zealand Herald under the title 'Brokers' Picks: The hot stocks to watch in 2022'