Portfolio Talk: David McClatchy

Where do see the New Zealand market being at the moment?
If you were insular in your view, New Zealand is compelling. However, international events and characteristics have a major influence on New Zealand financial asset prices, not only because of the high level of foreign ownership but also because of the effects on our trade based economy. Globally the activity of central banks, and the political platform being more stable, heightens confidence that whilst GDP is slowing, growth will still be positive and a soft landing will occur.
All this adds up to a level of calm we are seeing. That's most evident through the reduced market volatility of the past month. Lower inflation is here to stay and it's not a threat, in fact we are going to see central banks continuing to ease.
This provides us with confidence that the New Zealand market is well placed to perform well. We are at the tail end of a recession, and the Reserve Bank is easing monetary conditions and showing an accommodative stance. We have had a substantial amount of earnings downgrades but we are close to, if not at, the bottom of the earnings downgrade curve and we are seeing some signs of upgrades in earnings. Additionally anecdotal signals we are receiving are showing the economy in a better light than many analysts are forecasting. Heightened confidence and money flows into the Asia/Japan region and Australia proving to be robust throw the crises, and the relative valuation levels of New Zealand makes the New Zealand market much more compelling than international markets.

What stocks do you like?

We are tilted towards domestic cyclical stocks with firms like Telecom (despite having the question mark of regulation overhanging it). Waste Management. You can't have growth without rubbish, and the likes of Sky City, Sky Television, INL, The Warehouse and even Force Corporation. Despite Force having foreign income it has a very high ability to leverage off any pick up in the economy.
The companies we look for all have good management, strong domestic earnings, a strong balance sheet, pricing power and good cash flows.

What sectors do you prefer?
Rather than explicitly picking sectors we are taking a top down perspective and looking for companies exposed to domestic cycles rather than looking at international cyclicals. We have some defensive stocks as well. Defensive stocks are those that have an oligopoly. Typical stocks include Ports of Auckland, TranzRail, Telecom and INL.

What sort of returns do you expect from the New Zealand market in the next 12 months?
I hate to put a number on returns! Considering the market has historically posted returns of about 12 per cent gross per annum I'd like to think high double-digit returns are possible. However, that is contingent on a number of issues.