On JAN 30th, we introduced a long bias in the iShares MSCI New Zealand ETF (ENZL) under the guise of:
- A likely Quad #1 setup for the balance of 1H14: Looking to the subsequently reported data, real GDP growth accelerated to +3.1% YoY in 1Q form +2.2% prior, which was good for the fastest rate of growth in two years. CPI decelerated to +1.5% YoY in 1Q from +1.6% prior; it rebounded back to +1.6% in 2Q.
- Commodity reflation exposure: Looking to subsequent market performance, the CRB Commodity Index has appreciated +4.5% since then, inclusive of a +10.4% rip to its JUN 20th YTD high.
- Likely NZD/USD appreciation amid a then-outlook for tighter monetary policy: Looking to subsequent monetary policy adjustments, the RBNZ became the first DM economy to tighten monetary policy in the YTD by hiking its benchmark OCR +100bps from an all-time low of 2.5% in consecutive meetings from MAR-JUL.
Since then, the ETF has appreciated +7.5%, which has underperformed both the S&P 500 (SPY) – up +9.9% since then – and the MSCI World Index (URTH) – up +7.9% since then. Not terrible, but not our best work either; we obviously prefer to beat beta with our macro ETF recommendations.
Moving along, with the index fund recently breaking our immediate term-TRADE line of support (now resistance) amid a deteriorating fundamental outlook, we see no reason to stay involved on the long side at the current juncture.
Looking to the fundamental picture, two developments provide cause for alarm:
- Slowing high-frequency data pointing to a dour intermediate-term growth outlook: Looking to the table below, it’s easy to see that the vast majority of New Zealand’s [very detailed] survey, credit and export data are showing clear deterioration from a 3M, 6M and 12M trend perspective. That, coupled w/ the lagged effects of tighter monetary policy should put New Zealand squarely in Quad #4 for the third quarter, which is not particularly exciting for an equity investor in the absence of rate cuts or QE.
- RBNZ currency intervention: After the fourth +25bps hike last Thursday, RBNZ governor Graeme Wheeler stated that, “The level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.” This verbal intervention in FX markets comes after the threat of actual intervention in MAY, amid the following commentary: “The exchange rate is unjustifiably high because it has failed to respond to a slump in dairy prices.” While he may be merely jawboning to a large degree, FX investors clearly do not think that is the case. The NZD has fallen -305bps vs. the USD MoM, the third worst spot return over that duration across the 32 expanded major currencies tracked by Bloomberg. It’s also worth nothing that Wheeler has the full support of Prime Minster John Key in this initiative to weaken the NZD. Needless to say, he does not have ours.
All told, we think it pays to book the gain in New Zealand here. If you’re looking for places to put your money, our favorite ideas on the long side of Asia/Oceania remain:
- “Old China”: CLICK HERE TO ACCESS OUR LATEST RESEARCH NOTE
- India: CLICK HERE TO ACCESS OUR LATEST RESEARCH NOTE
- Indonesia: CLICK HERE TO ACCESS OUR LATEST RESEARCH NOTE
- Taiwan: CLICK HERE TO ACCESS OUR LATEST RESEARCH NOTE
Associate: Macro Team