Enjoy the Gifts that Keep on Giving When
You Invest ‘Down Under’
New Zealand is an awkward place for an American at Christmastime, as I learned during a trip there this past December.
That’s mid-summer in the Southern Hemisphere, and families spend their holiday at the beach. Yet, all the winter trappings of Santa season are on display wherever you look. Really disconcerting.
I’m reminiscing now because it’s Christmas in July in New Zealand (where it’s now winter and, thus, oddly appropriate). And it has a summer fruit that’s ripe for the picking right now. I’ll explain…
Central bank governor Alan Bollard is playing Kris Kringle. His agency, the New Zealand Reserve Bank, raised interest rates for the first time in three years.
They pushed up the Official Cash Rate last month by 0.25% (or 25 basis points, to the hardcore finance crowd).
Small nudge, true. But the move means the land of Middle Earth is now on board with central bankers in Canada, Australia and Norway, who have also recently raised rates. They all sense what’s really going on with all this phony money sloshing around the world.
They all want to head off inflation before inflation takes the head off their economies.
For an investor like me (someone who globe-trots to find profitable opportunities outside America), this is fine news! Suddenly, New Zealand is back on the investment radar.
Anytime a stable, financially viable country raises its rates vis-à-vis my hometown U.S. dollar, I perk up.
New Zealand’s assets are suddenly more attractive. The interest-rate spread between the N.Z. dollar, or “kiwi,” and the greenback has widened.
This makes the kiwi more appealing – it is worth more and more of my dollars. And that means good things for my preferred global investments: dividend paying companies.
The way I see it, if the kiwi’s appealing, then kiwi dividends are even more appealing.
When an economy is growing (which a rate hike clearly hints at), then corporate profits are expanding.
When corporate profits expand, companies generally share the wealth in the form of bigger dividend payouts.
And larger dividend payments when the kiwi is gaining ground on the dollar equals more greenbacks when you bring your money back home.
Sounds pretty good to me!
I’m not saying N.Z. stocks are suddenly up, up and away. The world remains a dicey joint.
Economic, market-based and politician (yes, you read that last one right) risks lurk around every corner. Sometimes they’re waiting in broad daylight with a big club to beat you over the head – particularly the politician risk (and particularly the U.S. politician risk).
That said, N.Z.’s baby step toward interest-rate normality means one thing to me as an investor … that it’s time to start mining this tiny nation for investment values before professional investors jump in with two hands groping for an alternative to the S&P 500 and the Dow.
Commodities – agriculture in particular – rule New Zealand’s economy.
Here’s a fun fact: Despite a Hobbit-sized land mass, New Zealand accounts for about 35% of the global dairy trade.
Kiwi cows are keeping Asia, especially China, fat and happy. In case you haven’t heard, dairy consumption is growing in Asia faster than you can say “cheese.”
And early investors in this sector are going to smile – all the way to the bank.
Kiwi interest rates will keep climbing and New Zealand’s commodities will gain a higher profile. And the best gains will come not to those who wait. Don’t be late to the party.
Now, this rate decision could definitely be a case of central bankers testing the waters.
Sure — maybe they just want to gauge how markets react and how the economy responds. The new rate-hike cycle may not go full force until fall. Who knows?
But whatever the case, the point remains the same: Institutional money will hit New Zealand sooner than later.
And I think you should be there first.
Look, N.Z. is not a huge market – just $50 billion or so. For comparison, Dow Jones Industrial Average component 3M Co. alone is $53.3 billion, give or take. An inflow of money into such a smallish exchange bears meaningfully on returns.
So, where would I be looking?
Yield, Baby, Yield …
I’ve been involved in New Zealand’s markets since 1995, and I can tell you the industries I’m nosing around include telecom, manufacturing, building materials, property, retail, healthcare and food.
N.Z. has some fine companies paying very attractive dividends – attractive like 4% to 9%!
So, I mean Attractive.
And these aren’t those loopy dividends that a troubled company is likely to axe in a couple of months. These are stable dividends paid by stable companies, whose stock prices just happen to be down these days because of that little global dustup we had.
I know some will grumble about “the consumer,” given the supposed near-extinction of that animal amid The Great Purging of the last few years. But N.Z.’s economy is looking up. Joblessness has fallen. Consumer sentiment is up, though consumers do remain cautious. Nevertheless, those are wonderfully divergent trendlines, given what the U.S. still struggles with.
And others will kvetch that higher interest rates are, in textbook terms, bad news for companies since rising borrowing costs pinch earnings. True. But coming off such low levels—the new rate is just 2.75%, after all—interest rates need to rise a good deal before hindering corporate growth and spooking investors.
Think about it this way: In the 1990s and the middle years of the last decade, rates in the US were in the 5% range … and down in N.Z. they were jumping around between the 6% and 8% range … and stock markets were whistling a carefree tune.
So I don’t have big fears that a new interest-rate cycle will suddenly clamp off profit growth and send N.Z. stocks back into hibernation.
For those who like the taste of kiwi—and those who’ve never tried it—now’s a good time to start digging in the dirt down under.
Until Next Time, Keep a Global View.
Jeff D. Opdyke
Senior Editor, The Sovereign Society