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Rate Hike Puts New Zealand ETF in Rare Company

Zacks Equity Research

While rate hikes have become common in emerging nations, it is still a very isolated occurrence for developed countries that are still in the process of recovery. New Zealand, a relatively small-sized and geographically isolated developed nation, however, recently broke this trend to fight inflation (read: Can Rate Hikes Save these Emerging Market ETFs?). 

Inside the Move

New Zealand is the first nation in the developed world to raise its benchmark interest rate this year. This was the nation’s first rate hike in almost four years. On March 12, 2014, the Reserve Bank of New Zealand raised its official cash rate by 25 bps to 2.75% and indicated that further tightening is possible.
The decision was widely anticipated as the central bank last year indicated that the inflation data is reaching the mid-point of the central bank's 1.0% to 3.0% target range which calls for the need of a rate hike. Last week, the central bank said rates will rise by 2% over the next 2 years and hinted that “it is necessary to raise interest rates toward a level at which they are no longer adding to demand”.  The rate hike should keep the housing bubble (in big cities like Auckland) in check. 

The step points at the steady growth of New Zealand’s economy which in fact prompted the Kiwi central bank to remove the stimulus package.  As per Bloomberg, rising dairy prices, the NZ$40 billion ($34 billion) worth of restructuring of earthquake-ravaged Christchurch and the strongest immigration in 10 years are basically boosting economic growth in the nation.

Boost to the Inflation and GDP Forecast

As per the RBNZ, Kiwi GDP will expand 3.3% in the year ending March 31, faster than the 2.7% rate estimated in December. The organization also expected the economy to grow 3.2% in the year through March 2015 from the earlier prediction of 2.8%.

Solid commodity prices supporting the terms of trade at 40 year highs, a record-high housing market, and rising domestic demand on migration gains led to this noteworthy growth. The nation’s business confidence soared to a 20-year high level in February.  

The central bank expects inflation to speed up to 2% by mid 2014, up from 1.6% forecasted earlier. The bank also expects inflation to hover around 2% for the next three years. Low level of unemployment and reduced tax burden are other positives for the economy.

Market Impact

While rate hike normally is viewed as a step that slows growth and the stock market normally gets punished by investors, we have not seen any such thing in this case. The market in fact is steadily rising since then with the only pure-play ETF on this nation – iShares MSCI New Zealand Capped (ENZL) – advancing 4.1% at the close of March 18, 2014. On the contrary, the New Zealand dollar traded higher on lifted inflation and growth forecasts.

ENZL in Focus

This ETF tracks the MSCI New Zealand Investable Market Index, giving investors exposure to 30 stocks. The product is not immensely popular with an asset base of $168.0 million and trading at a volume of about 35,000 shares per day. It charges investors 48 bps in annual fees.

The fund is not widely spread across individual securities. It puts nearly 65% of the assets in the top 10 holdings with Fletcher Building, Telecom Corporation of New Zealand and Auckland International taking the top three positions. The trio makes up for a combined 33% share. From a sector perspective, materials, industrials, consumer discretionary sectors, healthcare and telecom receive double-digit allocation.

In terms of performance, ENZL was on par with the American markets over the last one year, and in fact earned investors slightly higher returns. ENZL was up 23.23% in the year-over-year frame (as of March 18, 2014) as opposed to SPDR S&P 500 ETF’s (SPY) gain of 22.99%.  Also, the fund has added about 14.65% so far this year. The ETF currently pays 3.54% in dividend per annum (read: A Closer Look at New Zealand and Australia ETFs).

Bottom Line

Investors should note that there is a flaw in New Zealand investing. This export centric nation is already suffering from appreciating currency. The latest move spurred another round of strength in its currency which is a headwind for the economy as this will make exports of New Zealand’s all-important agricultural products very expensive.

Also, though New Zealand turns out to be one strong region attributable to minimal exposure to the Europe which is still recovering from its massive debt debacle, the nation’s primary export buyer, China, is going through a slowdown at present (read: Inside the Recent China A Shares ETF Slump).

Having mentioned the downsides, we still believe investors can easily take part in the New Zealand’s growth story and enjoy the recent achievement of exiting the easy money era.

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