Asia Focus Update January 2019 祝大家春节快乐 NEW ZEALAND - GENERAL BUSINESS UPDATE Both the New Zealand Dollar and the New Zealand Stock Exchange have been slowly recovering after taking large hits in October. Despite global unease, New Zealand’s economic outlook remains positive with business confidence relatively stable, albeit more subdued than 12 months ago. The Government’s financial statements for 2018 report rising forecasted surpluses and falling core Crown net debt. Against this background, New Zealand’s economy is forecasted to grow faster than that of its major trading partners. Since the coalition government came into power just over a year ago, it has enacted several of its election campaign policies, demonstrating a strong focus on environmental protection and regional development. The Prime Minister’s focus on environmental protection and climate change was again highlighted at Davos of the World Economic Forum last week. We expect this to be a key theme this year. It also established a Tax Working Group, chaired by former Finance Minister Sir Michael Cullen, which is due to report back in February this year and is expected to recommend some form of capital gains tax. Agribusiness is expected to perform well in the coming months, with dairy production off to a good start and favourable weather conditions foreshadowing a bountiful season for produce. To boost potential growth, New CONTACTS Zealand will need to tackle pressing concerns in the forestry and dairy sectors. One of the greatest issues facing the Robert McLean government is subdued business confidence over the last year. However, New Zealand Institute of Economic DDI: +64 9 977 5077 Research’s Quarterly Survey of Business Opinion showed Mobile: +64 21 987 050 business confidence recovered slightly in the fourth quarter [email protected] of 2018, signalling a more positive business confidence outlook for 2019. Victoria Anderson We expect to see continued strength in mergers and DDI: +64 9 977 5188 acquisitions in the New Zealand market, with private equity Mobile: +64 21 923 037 in particular being very active. We are unlikely to see new [email protected] Asia Focus Newsletter | 1 listings on the New Zealand Stock Exchange in any great • New Zealand Dollar: The New Zealand dollar (NZD) number and a review of New Zealand’s capital markets dropped to a two-and-a-half-year low in October (Capital Markets 2029) has recently been announced to (trading at 0.65 USD) following a long period of a flat investigate. OCR and continued US-China trade tensions. However, it has since recovered, trading at USD 67 cents on Our expectation for the year is that strong deal activity will 21 January after concern of a slowing US economy. The continue, with a number of attractive assets involved in NZD has steadily increased against the AUD in the last sale processes coming to market. NZX companies to watch quarter from its August low of 0.89 AUD and is currently include The a2 Milk Company, Fonterra’s recovery and trading at around AUD 0.94. The strengthening of the Fletcher Building. NZD against its Trans-Tasman counterpart is partially Please let us know if you or any of your clients are interested due to the slowdown of Australia’s GDP growth. The in discussing any of the topics covered in this newsletter, or NZD experienced a dip against the Euro and GBP in have any other enquiries about undertaking business in New October, but has since risen to 0.59 Euro and 0.52 GBP Zealand. You can contact us at asiafocus@simpsongrierson. respectively. com or feel free to contact any of the persons identified. • Share Performance: Continuing unease around Lastly, we take this opportunity to wish you a happy and US-China trade tensions has seen the global markets prosperous Chinese New Year. fall in the last quarter. The NZX50 did not escape the plunges in overseas markets in October, falling 8.6% THE MARKETS from an all-time high of 9376 on 21 September to 8566 • Residential Property Market: Residential housing values on 25 October. It has since recovered slightly, currently show modest growth across the country, driven largely sitting at 8976. Fletcher Building shares continued to by strong increases in the regions (especially Invercargill, fall in the last quarter, hitting an all-time low in late Dunedin, Whanganui, Palmerston North, Napier and November. Metro Performance Glass had a very rough Whangarei), as well as in Wellington. In contrast, the November with its share price plummeting 50% over Auckland market has plateaued in the last quarter (up 10 days to a record low of $0.40 in late November. just 0.1%) with some Auckland suburbs even showing Metro Performance Glass is slowly recovering, currently a decrease in average value. Auckland had 10,431 trading at $0.55. The a2 Milk Company shares saw an residential properties for sale at the end of November overall decline over the year since their record high in 2018, the highest it has been since April 2012, retaining March of $14.10 and are currently trading at $11.41. the buyer’s market. Despite continuing low interest Trade Me’s share price has increased sharply following rates, New Zealand’s residential property market seems a $2.5 billion takeover offer and is currently sitting just to be cooling with the national rate of growth falling below its all-time high ($6.37) at $6.34. Fisher & Paykel to 1.3% in the last quarter. This may be partially due Healthcare, Spark and Auckland International have been to increasing supply, as suggested by the 14.3% jump strong performers. Ones to watch for 2019 include in building consents issued in October compared to The a2 Milk Company, Fletcher Building and Fonterra. September. While building consent figures show a The NZX is still struggling to attract new listings, having move away from the stand-alone houses trend towards had several potential IPOs scrapped or delayed until multi-unit housing, the majority of new homes being later in 2019. Last week, the FMA and NZX announced consented are still stand-alone houses. The Reserve Bank an industry review of New Zealand’s capital markets - announced loosening of the loan to value ratio (LVR) Capital Markets 2029, to set out their vision and growth which is expected to boost the housing market. From agenda, to investigate what drives listing activity and 1 January 2019 - up to 20% (increased from 15%) of new how the NZX can be reinvigorated. Listings fell in 2018 as mortgage loans to owner occupiers can have deposits a variety of companies exited, and new listings continue of less than 20% and up to 5% of new mortgage loans to be few and far between. The capital gains tax which to property investors can have deposits of less than 30% is likely to be recommended by the Tax Working Group’s (lowered from 35%). The Tax Working Group’s report review is very likely to capture the sale of shares. which is expected to be released next month is likely to • Dairy Prices: Dairy prices at the latest Global Dairy recommend a capital gains tax in New Zealand. Any form Trade auction (15 January) showed an increase of 4.2% of capital gains tax adopted is likely to include residential compared to the previous auction. This marks the fourth investment property, but may exclude the family home. continuous price increase, with dairy prices trending The Government has indicated that it will not enforce a upwards since the 4 December auction. Whole milk capital gains tax in New Zealand before the next election powder, New Zealand’s largest dairy export, had been in November 2020. Asia Focus Newsletter | 2 on a steady decline until early December, but was up discovered in the South Island in July 2017. Eleven of 3% in the latest auction. Butter increased by 4.6%, and these infected farms are dairy farms and 20 are beef skim milk powder 10.3%. Fonterra reduced its forecast farms. So far, almost 50,000 cattle have been culled in farmgate milk price for the second time in October, from an effort to eradicate the disease. $30.5 million in $6.75 in August to $6.25-$6.50 in October, and now to compensation has been paid to farmers affected $6.00-$6.30 in their December forecast. Miles Hurrell, by Mycoplasma Bovis, with many claims yet to be Fonterra’s interim CEO, explained this drop as reflective processed. 68% of the costs for the eradication of strong global milk supply. New Zealand’s 2018/2019 programme will be funded by the Government, 30.08% production season had a strong start, with projections by Dairy New Zealand, and 1.92% by New Zealand Beef + placing dairy production at a record high. Lamb. The Government has emphasised its commitment to eradicating the disease, refuting speculation that it INDUSTRY-SPECIFIC UPDATE plans to shift into long-term management of the disease. Agribusiness • Acquisition of PGG Wrightson’s seed and grain business: • Fonterra reviews its assets and investments: Fonterra In October 2018, PGG Wrightson shareholders voted posted an after-tax loss of $196 million for the financial heavily in favour of selling the company’s grain and year ending July 2018. As a result, the co-operative seed business to Danish co-operative DLF Seeds. The announced a review on its major investments, assets Commerce Commission has since sent a letter of issues and partnerships. On the list was Fonterra’s investment to DLF in relation to the acquisition. A letter of issues in China’s Beingmate Baby & Child Food Co, as the suggests that the Commerce Commission may have investment has been performing poorly.