The Delicate Transition - Investment Outlook February 2021 - Jarden
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Investment Outlook February 2021
Jarden
Overview
February 2021 A year on, the impact of the Covid-19 pandemic continues to dominate investors
thinking. The big difference between now and then is that mankind currently has
several vaccines available to prevent its spread, with more vaccines in the pipeline.
Consequently, we can now see a time, probably in a years’ time, when the restrictions
which currently impede people’s movements and activities can be lifted and life
without pandemic restrictions returns to the developed world. Developing countries
are likely to lag due to issues which impede achieving the desired levels of
vaccinations in their populations.
However, this positive outlook is not without risks. Close attention will be paid to the
progress of the vaccine’s deployment, particularly as the number of vaccinations
deployed ramps up. There have certainly been some early issues, which have been
put down as the typical teething problems that could be expected when starting such
a massive undertaking.
In response to the impact of measures taken to control Covid-19, central banks and
governments took unprecedented action to support the people and businesses
adversely affected. None more so than in the US where an additional US$0.9 trillion
support package was announced after Christmas and a further US$1.9 trillion support
package is in the process of being approved. Such massive stimulus has caused
investors to start thinking about when the US Federal Reserve (Fed) and other central
banks may start to reduce support. We explore the potential impact on financial
markets.
In this edition of the Investment Outlook, we profile Darrin Grafton, the CEO and co-
founder of travel booking company Serko. While Serko has a fascinating future in front
of it as it expands globally and rolls out new technology designed to improve people’s
travel experience, the adverse impact of Covid-19 on its revenue has been
extraordinary. Under Darrin’s leadership, Serko has met these challenges head on and
continues with its expansion plans.
As noted in our last edition Jarden has made a significant investment in establishing
an Australian business. A key part of the business is the establishment of a research
team under the leadership of the highly respected consumer analyst Ben Gilbert. We
take this opportunity to introduce Ben to you and discuss the new approach to
research that he and the extensive research team will bring to you. With the research
team now largely complete evidence of their work will become increasingly evident in
the coming months as they ramp up research coverage of the Australian equity
market.
John Norling,
Director, Head of Wealth Research
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 2
Investment Outlook February 2021
Contents
The Top Five Issues for 2021 ............................................................................................................................................... 4
Asset Allocation – Caution May Reign Until More Confidence Returns ....................................................... 8
Company CEO – Darrin Grafton, Serko ………………………………........................................................................................ 13
Introducing Ben Gilbert, Head of Australian Research ……………….…………………….................................................. 15
Top Stock Picks - 2021 ……………..………………….………………...…................................................................................................. 17
New Zealand Equity Metrics ............................................................................................................................................... 27
Australian Equity Metrics ...................................................................................................................................................... 28
Global Equity Metrics ............................................................................................................................................................. 29
Interest Rates – Coming to the End of the Road ….…..….……………............................................................................ 30
New Zealand Dollar – Well Supported …....................................................................................................................... 31
To Rebalance or Not to Rebalance? …........................................................................................................................... 33
Reminder – New Regulation on its Way ……................................................................................................................. 34
Importance of Being Independent ….............................................................................................................................. 35
Jarden in the Community – Surfing for Farmers .…………......................................................................................... 36
Calendar ....................................................................................................................................................................................... 37
Your Local Jarden Team ..................................................................................................................................................... 38
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 3
Investment Outlook February 2021
The Top Five Issues
for 2021
Key Takeaways The Vaccine Game Changer
• Investors expect While the Covid-19 pandemic was the worst thing to come out of 2020, the rapid
vaccines to put an development of effective vaccines was the biggest positive. Vaccines have provided a
end to the Covid-19 much more certain outlook for many companies. However, it will not be until herd immunity
disruption as herd is reached in early 2022 that large scale testing, mask wearing, and tracking will end, and
immunity is travel restrictions will be lifted allowing borders to reopen.
achieved
Herd immunity is achieved when a sufficient proportion of the population is simultaneously
• The risk of higher
immune to prevent sustained virus transmission. The chart below illustrates how different
inflation re-
levels of natural immunity in the population, the vaccine’s efficacy and the proportion of the
emerging is being
closely monitored population vaccinated achieves herd immunity. For example, herd immunity can be
achieved with 90% efficacy,10% natural immunity and 65% vaccine coverage. The one
• A gradual reduction
variable which affects herd immunity not shown below is how infectious the virus is. The
in excess liquidity
more infectious the virus, the greater the proportion of the population that needs to be
should see equity
vaccinated or have natural immunity. This is the concern with the new strains of Covid-19
valuation multiples
ease from the United Kingdom and South Africa. Compounding the problem is that it gets
increasingly difficult to vaccinate additional people as the proportion of the population
• Concerns about
vaccinated increases.
regulation
resurface
• House price growth
is expected to
dwindle as
underlying
fundamentals
soften
Achieving Herd
Immunity
Source: McKinsey
Things to watch which could undermine the achievement of herd immunity:
1. Significant supply chain or manufacturing delays.
2. Unexpected safety issues with the vaccines.
3. Shorter than anticipated duration of immunity after being vaccinated.
4. A slower than expected rollout of the vaccination. To date, where this has been the
A slower than expected
case it has been dismissed as teething issues.
vaccination rollout
5. Problems arising from each vaccines dosing protocol not being followed correctly.
6. Not getting a high enough proportion of the population vaccinated.
7. More infectious strains of the vaccine arising.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 4
Investment Outlook February 2021
Inflation and Employment
Despite recent subdued inflation globally, investors’ expectations of future inflation are
trending up. This has become apparent as investors have raised expectations of future US
government spending in the wake of the Democratic Party winning the US presidency and
gaining a slim majority in Congress. In the short-term, inflation is likely to rise modestly
because prices were so depressed amid pandemic lockdowns last year. Investors appear
to be expecting higher inflation to persist. Is this justified?
2.0
US Market 5-Year
Inflation 1.8
Expectation
Source: Bloomberg 1.6
%
1.4
1.2
1.0
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21
A possible omen of higher inflation is the combination of extremely loose monetary policy
and substantial increases in government spending. Once countries are sufficiently
vaccinated, with all that money sloshing around there is a risk people go on a spending
spree. Supply of goods and services may struggle to keep up, thus stoking higher inflation.
A bit of extra inflation The US Federal Reserve and other central banks have clearly indicated they would be
will keep central banks happy to see inflation moderately above 2% before they even consider tightening monetary
happy policies. They will almost certainly not react as prices rebound from depressed levels a year
ago.
There are counterforces at play, however. Unemployment in major developed economies is
likely to remain significantly higher than pre-pandemic rates and spare capacity will take
But relatively high time to dissipate. This will continue to dampen prices, particularly for services which
unemployment will typically drives inflation. Unemployment may well persist above pre-pandemic rates for a
prevent inflation from considerable period if a spending spree does not eventuate and firms cautiously re-employ
surging… workers. Secular forces such as e-commerce growth, outsourcing production to countries
with cheaper labour, and consumer preferences for experiences over goods keep inflation
low. Finally, future Inflation is influenced by past inflation, so subdued inflation will likely
persist.
… and central banks will There will also be a limit to central bank tolerance for higher inflation. Experience has shown
have a limit to how that once the inflation genie is well out of the bottle it is difficult to put it back in again.
much inflation they will Although central banks have committed to keeping policy interest rates at current low
tolerate levels for an extended period, possibly until 2023, they will start to ease back on asset
purchases much sooner. The Fed will likely start tapering its asset purchases by the end of
2021, with other central banks following in 2022.
Turning off the Liquidity Tap
There is a strong relationship between the expansion and contraction of equity valuation
multiples and the level of excess liquidity in the economy (defined as the difference
Equity valuation between the money supply growth and nominal economic growth). In recent times, the
multiples are affected amount of excess liquidity in the economy has been massive. Consequently, interest rates
by growth in excess have fallen even though governments have significantly increased spending, as the debt
money supply issued has been bought by central banks. These two factors have caused valuation
multiples to expand to very high levels and credit spreads on investment grade debt
securities have contracted to very low levels.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 5Investment Outlook February 2021
Currently there appears little risk of the liquidity tap being turned off now as inflation is low,
unemployment is high (therefore there is spare capacity in the economy) and central banks
There appears little risk have openly stated that they expect to err on the side of too much inflation rather than too
of the liquidity tap being little. This reflects the failure to meet inflation objectives over many years.
turned off now… However, this scenario has recently being called into question following the announcement
of an additional US$1.9 trillion of fiscal stimulus. This has seen 10-year US Treasury bond
interest rates rise 0.2% to 1.1% and some commentators forecast that the Fed will start
… although some tapering its bond buying program by September 2021. Tapering is expected before any
commentators expect change is made to the Fed Funds Rate. As noted above, whether this occurs will depend on
the Fed may start inflation being comfortably above 2% and unemployment falling. We expect that any
tapering its bond change in policy will be very gradual and well telegraphed to financial markets as the Fed
buying program by will not want to spook investors like it did in 2013. This being the case, any resulting
September 2021 valuation multiple contraction is likely to be largely offset by higher earnings growth. The
net result being lower returns being generated by equities, but not losses.
Regulation Emerges From its Den
Regulation has again risen up the list of investors’ concerns. This reflects numerous
concerns around the big technology companies and the election of Joe Biden as US
President combined with the Democrats gaining control of both houses of government.
There is a risk that the huge market shares gained by the big technology companies (for
example Google has 92% share of internet search in the US and 75% of US households
Technology companies’ have an Amazon Prime account) ends up working against them. While large market shares
large market shares are partially due to their popularity with consumers, there are real concerns surrounding
may work against them some of the technology companies’ actions. Some examples include failing to take an
adequate ‘duty of care’ for the content published on their sites and the pre-installation of
their applications on hardware they sell. It should be noted that the concerns do not just
come out of the US with regulatory action recently being taken in regions including the
European Union, United Kingdom and Australia. However, typically the probes which result
in new regulation take time to complete and generally result in incremental change. There
China’s large is greater concern in China where a probe has started into Alibaba’s activities and the
technology companies Peoples Bank of China has issued an order requiring Ant Group to return to its payment
appear to be making the services roots. It appears that the Chinese big tech companies are getting too big, too
Chinese government quickly and are gaining influence over the population, which is making the Chinese
nervous government nervous. While the outcomes are uncertain, history suggests that resulting
actions will be manageable for the companies affected and may slow growth somewhat,
but not stop it.
A Democrat government in the US poses risks for some US companies in the energy,
healthcare, technology, and communication services sectors. However, it is worth
remembering that the Democrats have a very large list of items they want to tackle. Top of
the list is to stop the Covid-19 pandemic followed by the implementation of as much of their
$1.9 trillion fiscal stimulus package as possible. Also high on their agenda is getting the US
back into the Paris Agreement on Climate Change and a focus on green energy. Over time
this will be a headwind for the oil and gas industry. Although to date the only change is to
no longer issue permits for fracking on government owned land. Other key issues include
reversing Donald Trump’s isolationist foreign policy, combating racism and undoing
Trumps’ migration policies. The healthcare sector is expected to see a cap on drug prices
and reduced health insurance premiums as all Americans are given the ability to enrol in a
public health insurance plan. However, there is little time to achieve them with the mid-term
elections due in 2022, where the Democrats tenuous grip on power may be lost, thus
making policy/regulatory change very difficult.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 6Investment Outlook February 2021
Finally, it is worth remembering that regulation can be positive for some companies. The
Regulation can be
expected focus on climate change and clean energy will benefit companies looking at
positive for some
hydrogen as a fuel, wind generation and companies making home insulation products. The
companies
clean energy thematic has already received much attention as evidenced by the dramatic
rise in the iShares Global Clean Energy Fund.
A Cooler Housing Market
The housing market has surged since July, with accelerating sales and price increases. This
Monetary and fiscal
defies earlier predictions that the local housing market would be hampered by Covid-19
stimulus and lack of
lockdowns and closed New Zealand borders. The spark for the housing fire has been the
housing supply have
“go hard and go early” monetary and fiscal policies of the Reserve Bank of New Zealand
boosted house prices
(RBNZ) and the Government. A housing shortage has fanned the fire.
25.0%
20.0%
New Zealand
House Price Index 15.0%
Source: Real Estate New 10.0%
Zealand
5.0%
0.0%
-5.0%
-10.0%
1993 1996 1999 2002 2005 2008 2011 2014 2017 2020
Recognising that the hot housing market presents a growing risk to financial stability, the
Loan-to-value RBNZ recently announced it will reinstate loan-to-value restrictions on bank mortgage
restrictions will start to lending from March. However, the major banks have already instituted the proposed loan-
take heat out of housing to-value limits as they recognise the dangers of liberal mortgage lending in a climate of
market… rapidly rising house prices and uncertain economic prospects. We expect the loan-to-value
limits will start to dampen housing activity from March 2021.
By March, the housing market is likely to be cooling anyway. This reflects New Zealand’s
border being largely closed until early 2022, which will limit the number of migrants and
… at a time the housing overseas students. With the government wage subsidy scheme now ended and unlikely to
market is likely to be be replaced, unemployment is set to rise. In the past, significant rises in unemployment
cooling anyway have tended to dampen house prices as incomes stagnate and people worry about their
jobs and businesses. At the same time, house building has been continuing at pace, which
is steadily increasing the supply of houses and easing the pressure on house prices. Still,
low mortgage interest rates and the prospect of a post-pandemic economic activity will
provide underlying support for house prices. Therefore, annual house price inflation is likely
to ease to around 0-5%.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 7Investment Outlook February 2021
Asset Allocation –
Caution May Reign Until
More Confidence Returns
Key Takeaways A Global Economic Recovery Remains on the Horizon
• Low interest rates The surge in Covid-19 infections and reinstatement of lockdowns of various degrees of
likely to continue stringency in large, developed economies means a weaker prognosis for the global
despite a surging economy in the first quarter of 2021. Unemployment has flatlined at levels above those
post-pandemic prevailing prior to the pandemic and retail activity has been in decline in recent months
economy.
after a strong initial bounce off the first wave of lockdowns.
• Recovering
economies and 7,000
low interest rates
likely to provide 6,000
support for
5,000
equities.
• Uncomfortably 4,000
high inflation is
the biggest risk to 3,000
equity valuations.
2,000
US Initial Jobless 1,000
Claims 0
Source: US Department of Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20
Labor, Bloomberg
In the US, much of the recent pull-back in household spending has been due to job losses
and the expiration of previous government income support under the Coronavirus Aid,
Relief, and Economic Security (CARES) Act. However, with the recent passing by the US
Congress of $US900 billion in additional support, and $US1.9 trillion more support
promised by the incoming Biden administration, fiscal policy will substantively compensate
for declining wage income until the US economy normalises. Elsewhere in the world,
governments have indicated that they will similarly stoke spending to compensate for
short-term loss of wage incomes and to ensure households keep spending.
Eventually, vaccinations will reach a point where a high degree of community Covid-19
immunity is achieved. However, it will take a while to vaccinate on a sufficient scale to allow
a full return to normal life in the world’s largest economies, probably towards the start of
Households have built 2022. By this stage, governments are likely to have started pulling back from large-scale
buffers to spend post- fiscal support. Households have significantly increased their savings during the pandemic
pandemic and are in positions to increase spending when the time allows it. However, after an initial
surge in spending, a degree of spending caution may reign for a period as people regain
confidence to mingle in the post-pandemic world. This could delay a return to pre-
pandemic levels of activity until at least early 2022.
Inflation could spike Despite economic light on the horizon, central banks are unlikely to materially reverse their
up in short-term but ultra-accommodative policies in the foreseeable future. Although there could be a
unlikely to be a temporary spike in inflation as prices lift from depressed levels experienced last year,
problem longer-term elevated levels of unemployment and peoples’ entrenched expectations of continuing low
inflation is likely to lead to only moderate inflation in the foreseeable future.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 8Investment Outlook February 2021
In any case, many central banks have made it clear that they will tolerate higher rates of
In any case, central
inflation than their mandated targets of around 2% to make up for persistently low inflation
banks will tolerate
in recent years. This means central banks will keep low interest rates and accommodative
higher inflation
monetary policy settings until there is clear evidence of achieving 2% inflation and, even
then, will be careful about removing stimulus too soon.
Global Equities Supported in the Medium Term
On a short-term basis the risk of an equity market correction is increasing as investors factor
in a solid run of positive news, which has left limited space for disappointment. To a large
degree, the positive outlook hinges on a successful Covid-19 immunisation campaign. It
will be important to monitor progress as the campaign ramps up.
However on a medium-term view, rock bottom interest rates mean that investors seeking
Equities appear regular investment income and/or who seek to protect the inflation-adjusted value of their
attractive compared
investments have been forced to look at riskier investments, like equities. Equity valuations,
to bonds therefore, compared to their traditional investment alternative, debt securities, continue to
look attractive on a medium-term horizon.
On a shorter horizon, US money supply has rocketed up over the past year due to large-
scale US Federal Reserve asset buying, as shown in the chart below. We expect the Fed will
Fed likely to reduce its recognise the need to ease back on its bond buying by the end of the year as the economy
bond buying recovers. However, it will also be wary of sparking a sharp rise in bond interest rates, as
gradually but money happened in the disruptive 2013 “taper tantrum”. Therefore, reductions in Fed asset
supply will increase at purchases are likely to be signalled well in advance and be relatively gradual. Money
a good pace supply growth will likely continue to be strong, which has traditionally been supportive of
equities.
70%
US M1 Money
60%
Supply – Annual
Percent Change 50%
Source: US Federal
40%
Reserve, Bloomberg
30%
20%
10%
0%
2014 2015 2016 2017 2018 2019 2020
There is still a higher degree of anxiety amongst equity investors about the short-term
outlook than existed pre-pandemic. This is reflected by a higher level of the VIX Index,
Still room for equity which is an indicator of US equity investors’ expectations of market volatility over the next
investor nerves to three months. Lower levels of the VIX are often associated with higher equity valuations, so
calm a reversion to calmer market prices as economies recover from the pandemic could see
further support for equity valuations.
A combination of improving economic growth, low interest rates, and surplus financial
Cyclical stocks could market liquidity will favour equities of a more cyclical nature relative to more defensive parts
outperform more of equity markets. These will tend to be the stocks that have largely underperformed the
defensive areas of rest of the equity market in recent years, such as those in the financial, energy, materials,
equity markets and industrial sectors. In contrast, stocks that have substantially outperformed in the period
of low and falling interest rates, Covid lockdowns, and uncertain growth prospects, such as
the large technology companies, may struggle to keep pace with the market overall.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 9Investment Outlook February 2021
A key risk to our constructive outlook on global equities is a sharper rise in inflation than
Uncomfortably high
central banks are comfortable with. Central banks will be quite happy to see inflation lift
inflation is a relatively
moderately above 2% for an extended period. Inflation in the 2-3% range has historically not
low probability but
been detrimental to equity valuations, as the following chart shows. However, when
could have major
inflation has risen above 3% it has tended to coincide with lower equity valuation multiples.
effects on equities if it
This is likely because central banks often must sharply raise interest rates to get inflation
occurs
back under control, which hurts equity prices.
20
Price-to-earnings multiple 18
US Price-to-
Earnings Multiple 16
and Inflation 14
Source: US Bureau of Labor
12
Statistics, Bloomberg
10
8
6
-1 - 0% 0 - 1% 1 - 2% 2 - 3% 3 - 4% 4 - 5% 5 - 6% 6%+
Inflation
Have New Zealand Equities Run Out of Puff
New Zealand equity The New Zealand equity market has outperformed many other developed equity markets
valuation ratios have a in recent years. This is largely due to the outperformance of growth stocks such as Fisher
tight relationship with and Paykel Healthcare and high dividend yield stocks such as the electricity generators.
long-term interest The share prices of companies in the retirement village sector have benefited from rising
rates house prices. Performance in these parts of the market have been driven by low and falling
interest rates, which makes stocks in them more attractive. The chart below shows the
relatively tight past relationship between New Zealand equity valuations, as measured by
price-to-earnings multiples, and the 10-year government bond interest rate.
40
New Zealand
Price-to-earnings multiple
35
Price-to-Earnings current
Multiple 30
Correlates with
25
Long-term
Interest Rates 20
Source: Bloomberg
15
10
0% 1% 2% 3% 4% 5% 6% 7%
Government bond interest rate
Looking ahead, we expect long-term New Zealand interest rates to gradually rise. Based on
Local equities are
past relationships, higher interest rates will be more of a headwind for New Zealand equities
vulnerable to
than for global equities. In addition, the New Zealand equity market is not significantly
underperformance as
leveraged to the global economy due to the largely domestic focus of New Zealand listed
interest rates rise
companies so probably will not benefit to the same degree as more cyclical equity markets
from a revival of global economic activity once the Covid vaccines take effect.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 10Investment Outlook February 2021
Cyclical Exposure to Benefit Australian Equities
In contrast to New Zealand equities, the performance of Australian equities have lagged the
performance of many other developed equity markets over the past year. However, the
Australian equity market is well positioned to take advantage of the global economic upturn
Australian equities brought on by Covid-19 vaccines and moderately rising interest rates. Australian equity
could benefit from a valuation ratios are not generally as high as markets like the US or New Zealand. Because
global upturn and the Australian equity market has a relatively high concentration of listed companies with
higher interest rates positive exposure to commodity prices, like iron ore and copper, that should perform well
as the global economy recovers. In addition, the Australian equity market has a relatively
high proportion of bank stocks, which are expected to perform well as interest rates
gradually rise. Furthermore, the Reserve Bank of Australia has materially lifted the cap on
the level of dividends the banks can pay their shareholders.
Forecasts
Economics As at 28 January 2021
Fiscal Balance % GDP GDP Growth % Inflation % 3 month Libor % 10 Year Government%
2020E 2021F 2022F 2020E 2021F 2022F 2020E 2021F 2022F Spot 3mth 12mth Spot 3mth 12mth
New Zealand -8.5 -7.7 -10.2 -4.7 4.5 3.3 1.4 1.5 2.0 0.3 0.3 0.3 1.1 1.1 1.4
Australia -8.0 -7.2 -7.3 -2.9 3.6 3.0 0.7 1.5 1.8 0.0 0.1 0.1 1.1 1.1 1.3
US -15.6 -16.0 -9.7 -3.5 4.1 3.4 1.2 2.0 2.1 0.2 0.2 0.2 1.0 1.1 1.3
Japan -13.0 -11.9 -7.5 -5.3 2.6 1.9 0.0 0.1 0.5 -0.1 -0.1 -0.1 0.0 0.0 0.0
Europe -9.5 -9.6 -5.0 -7.3 4.3 3.9 0.3 0.9 1.2 -0.5 -0.5 -0.5 -0.5 -0.4 -0.2
United Kingdom -18.7 -13.9 -7.2 -10.8 4.7 5.7 0.9 1.5 1.9 0.0 0.1 0.1 0.3 0.4 0.8
China -6.7 -6.7 -5.9 2.1 8.2 5.5 2.6 1.6 2.3 2.6 3.0 2.9 3.1 3.3 3.3
Source: Jarden, Bloomberg (* actuals)
NZ and Australia fiscal balance is 30 June
NZ is the 90-day bank bill yield
Equities and Commodities Foreign Exchange
Spot 12 mth forecast Past Past
USD NZD
Month Year
Australia – ASX 200 6,770 6,590 - 7,280 1.4% -4.4% Spot 12mth Spot 12mth
Emerging Markets 1,401 1,410 - 1,560 10.5% 22.3% NZD 0.72 0.74 - -
Europe – Stoxx 600 411 410 - 450 3.8% -3.1% AUD 0.78 0.80 0.93 0.92
Japan - Topix 1,850 1,900 - 2,100 3.1% 6.0% EUR 1.22 1.25 0.59 0.59
New Zealand – NZX 50 13,026 12,800 - 14,140 2.7% 10.9% JPY 103.5 102.0 74.7 75.5
UK – FTSE 100 6,740 6,950 - 7,680 3.2% -11.9% GBP 1.37 1.37 0.53 0.54
US – S&P 500 3,852 3,760 - 4,150 3.8% 15.7% CNY 6.46 6.50 4.66 4.81
Oil Brent USD/bbl 56 54 - 60 7.3% -5.4% Source: Jarden, Bloomberg
Gold USD/Oz 1,872 1,900 - 2,100 -0.5% 19.9%
Source: Jarden, Bloomberg
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 11Investment Outlook February 2021
Asset Allocation
February 2021
Based on the Asset Allocation discussion on pages 8-11, we have not made any changes to our Tactical Asset Allocation.
The Strategic Asset Allocation represents the average weighting over the long term (circa ten years or an entire economic
cycle). The Tactical Asset Allocation represents a deviation from the Strategic Asset Allocation to take advantage of
expected changes in asset class returns over the short term (say 6 months plus).
% Strategic Allocation Tactical Deviation %
Income Assets Growth Assets
Conservative
Cash 15 -2 +1
NZ Debt Securities 55 +2
Property 4 -2
NZ Equities 8 -1
Australian Equities 3 +1
Global Equities 12 +2
Alternative Strategies 3
Balanced/Conservative
Cash 11 -2 +1
NZ Debt Securities 44 +2
Property 5 -2
-1
NZ Equities 12
Australian Equities 6 +1
Global Equities 18 +2
Alternative Strategies 4
Balanced
Cash 8 -2 +1
NZ Debt Securities 32 +2
Property 6 -2
NZ Equities 16 -1
Australian Equities 8 +1
+2
Global Equities 25
Alternative Strategies 5
Balanced/Growth
Cash 7 -2 +1
NZ Debt Securities 23 +2
Property 6 -2
NZ Equities 20 -1
Australian Equities 10 +1
Global Equities 29 +2
Alternative Strategies 5
Growth
Cash 5 -2 +1
NZ Debt Securities 15 +2
Property 6 -2
NZ Equities 23 -1
Australian Equities 12 +1
Global Equities 34 +2
Alternative Strategies 5
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 12Investment Outlook February 2021
Darrin Grafton – Serko
CEO & Co-Founder
It is quite conceivable that Darrin could describe his place of residence as “no fixed
abode” given the huge amount of travelling he did prior to the Covid-19 pandemic.
He fully expects this to be the case again once the pandemic is brought under
control and travel restrictions are lifted. He notes that while applications like Zoom
have been a great solution to the immediate problem of travel restrictions, humans
are social beings and thrive on face-to-face connections.
Growing up in Waimauku
Darrin Grafton
Darrin’s life started on the family’s Waimauku dairy farm on the outskirts of
Auckland. Being the eldest son, he helped out on the farm before and after school
Key Takeaways
from a young age. This instilled in him a strong work ethic, tenacity, and problem-
• As a boy, Darrin
solving skills. Darrin recollects that at school he was good at maths, really enjoying
developed acute
solving mathematical problems and looking for patterns in data. While he typically
problem-solving
skills which have
did well in school exams, his school reports had a continual theme – “could do
served him well. better”. Looking back, he thinks he must have been a rather disruptive child to have
in the classroom, due to his constant chatter.
• Darrin loves to set
and achieve Living close to Muriwai Beach it is little surprise that Darrin enjoyed surfing in his
extreme goals. spare time. In addition, from the age of fifteen he took up Kung Fu, training five
• Serko’s goal is to nights a week for eight years.
make business
travel an easy Leaving school in the sixth form Darrin got his first exposure to computers at
stress-free Carrington Polytechnic (now Unitec Institute of Technology). Having had no prior
activity, exposure to computers, he was selected as one of a handful of successful
particularly when applicants based on an aptitude test. Initially he found the course content
unforeseen challenging and was assisted by a teacher who, on his own time, came into the
disruptions occur. polytechnic each weekend to help Darrin’s learning. This resulted in a light bulb
• Darrin is moment when all the concepts being taught fell into place, from which point there
passionate about was no holding Darrin back.
New Zealand Inc
It was at Carrington that Darrin first met his lifelong business partner Bob Shaw.
Darrin and Bob have had and continue to have numerous business ventures
Darrin met his lifelong together including jointly founding Interactive Technologies in 1994 (which
business partner Bob
became Gullivers Travel Group) and Serko in 2007. On completing their studies
Shaw at Carrington
both ended up working for IMaCS creating corporate accounting software using
Polytechnic in 1985
Cobol.
In his spare time Darrin loves boating and fishing. Being on the water is the trigger
for him to switch off and relax. Despite being deeply involved in his work Darrin puts
family first. His family is very important in keeping him grounded, which is important
as he has a habit of setting extreme goals.
Darrin as Serko’s CEO
Darrin has a mantra of executing on what you say you will, and never to hype
Customer loyalty is expectations. He also believes that honesty, helping clients during a crisis, humility,
reflected in Serko’s and trust build loyalty. Customer loyalty is reflected in Serko’s high retention rate.
high retention rate Many loyal customers also become your advocates.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 13Investment Outlook February 2021
Darrin enjoys nothing more than dreaming up solutions to problems. The ultimate
problem, and Serko’s reason for existing, is to make travel an easy stress-free
Solutions are backed activity, particularly when unforeseen events disrupt travel plans. The solutions he
up by rigorous data dreams up are backed by rigorous data analysis and are then brought to life by
analysis Serko’s super talented and diverse staff. Having great staff allows Darrin to
comfortably relinquish different aspects of his responsibilities as Serko grows and
he finds that he is doing too much. To ensure that he is up to the task, Darrin sets
aside time each day for himself and ensures that all emails are answered each day.
In running the business, Serko and Darrin have received numerous awards. Darrin
is most proud of being selected as one of the world’s top 25 most influential
executives by Business Travel News in 2014 and Serko being recognised as the
2020 HiTech Company of the Year, a fitting tribute to the success of the Serko
team.
Covid-19 Travel Restrictions Bite
Covid-19 travel restrictions have dramatically impacted Serko’s revenue and
earnings. In the six months to 30 September 2020 the number of travel bookings
fell 77% and total revenue fell 66% before factoring in any government grants.
Looking to the immediate future it is worth remembering that 93% of Serko’s
revenue is generated by domestic business travel in New Zealand and Australia.
New Zealand travel
New Zealand bookings have quickly recovered, currently nearly 90% of pre-Covid
bookings are now at
levels. Australian bookings have been slower to recover due to successive Covid-
nearly 90% of pre-
19 outbreaks leading to travel restrictions. Eventually, New Zealand’s dramatic
Covid levels
recovery is expected to be mirrored in Australia. While the impact of Covid-19 on
travel, and Serko’s revenue, remains highly uncertain in the short-term, Serko
expects to be able to manage its costs in line with the level of revenue which
eventuates and thus achieve its earnings target.
“Cash is more When it comes to managing a company’s cash position Darrin quips, “cash is more
important than your important than your mother”, as a company without adequate funding has few
mother” options. Consequently, Serko is constantly running scenarios to test that it has
adequate cash, with adequate being at least $16-18 million (following the recent
equity capital raising Serko had over $90 million cash). The business cases for the
different development projects are also regularly tested under various scenarios,
with immediate action taken whenever necessary to get a project back on track.
The issue which keeps Darrin awake at night, is not the pandemic, but the ability to
employ enough staff with the required skills and experience. Since September
2020 Serko has employed over 50 new staff and expects to employ 50-100 more in
2021.
Serko’s medium-term goal is to achieve $100 million revenue. There are several
paths Serko can take to achieve this. They include expansion in Australia, North
America, and Europe, rollout of Zeno and through the expansion of Bookings.com
for Business powered by Zeno. achieving the goal does not require all of these to
Zeno Travel eventuate. Success could come via one or a combination of partial successes.
The Vision for New Zealand Inc
Darrin’s goal is to see Darrin is passionate about New Zealand, which includes keeping Serko listed here.
New Zealand become Through mentoring of tech start-ups, it is Darrin’s goal to see New Zealand become
a global technology a global technology hub. In time as the value of Serko grows Darrin expects to
hub gradually sell down part of his interest in Serko so that he can further assist new
companies establish themselves by providing them with capital.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 14Investment Outlook February 2021
Introducing Ben Gilbert –
Head of Australian Research
Jarden has made a significant investment in Australia. A significant part of this
investment involves the creation of an extensive research capability which will benefit
our New Zealand Wealth Management clients. This process started with the
appointment of Ben Gilbert as Head of Australian Research.
Since starting in September, Ben has initiated coverage on the Australian food sector
and employed a research team of nearly twenty analysts, who all will have commenced
work by early February. The research team will be completed once a couple more
analysts are hired. As shown in the graph on the following page, by the middle of the
year we expect Jarden’s coverage of Australasian listed companies to rank in the top
Ben Gilbert three of all equity research teams in Australasia.
Key Takeaways A Proud South Australian
• During his school Ben was born and bred in Adelaide. He was educated at St Peter’s College, a highly
years Ben proved
regarded boy’s school in Adelaide. There Ben undertook the International Baccalaureate
himself to be multi-
diploma program which involved a broad subject matter – chemistry and economics at
talented both inside
which Ben excelled plus English, maths, art and Chinese. Ten years of studying Chinese
and outside the
culminated in a trip to China which included staying with a family in Shanghai for a
classroom.
period. Outside the classroom Ben enjoyed skiing, qualifying as a state representative. In
• Ben has almost
relating to this achievement, he adds with a wry smile that being in Adelaide the skiing
completed building
was all indoors. Ben also played AFL although switched codes in his final year to qualify
a new Australian
for the first eleven soccer team and go on a trip to New Zealand where his team played
equity research
against five different North Island schools. Despite this temporary change in sports, Ben
team with the future
firmly in sight. remains an avid AFL fan and supporter of the Port Adelaide Power. To ensure that his
five-year-old son shares his passion for the sport he recently signed him up to AFL
Auskick, which teaches kids fundamental motor skills and what it means to play as part
of a team. These days Ben enjoys the occasional ski, running and is very keen to get a
Jarden netball or soccer team going in the Sydney office.
Off the sports field Ben was a successful debater. He always went as the third speaker of
the debating team. Being the third speaker it was his role to attack the substantive
arguments raised by the opposing team, which allowed him to hone his skills of thinking
on his feet. In a similar vein, Ben also enjoyed mooting (an oral presentation of a legal
The loss to the legal issue against an opposing counsel) where he represented his school in state
fraternity is a gain to the competitions. This raises a question as to why he chose a career in investment research
equity research rather than law. For him, the answer reflects the action and dynamic nature of financial
profession markets. Consequently, on leaving school Ben headed for the University of Sydney to
study finance, accounting, and economics rather than staying in Adelaide to study law.
While Ben recounts that he was more focused on having a good time at university than
his studies, he clearly did well, first gaining an internship at KPMG and then an internship
at UBS.
The next fifteen years of his career were spent at UBS, where he was Deputy Head of
Consistently ranked as Research and led the consumer research team. Since 2015, Ben has consistently ranked
Australia’s number one as Australia’s number one consumer analyst in multiple surveys across the retail and
consumer analyst food/beverage sectors. In addition to the dynamism financial markets dish up constantly,
Ben finds significant satisfaction in being able to build a unique helicopter view of the
sectors he analyses. The unique view that equity analysts can develop reflects the wide
range of stakeholders that analysts get to speak to, many of whom do not or will not
speak to each other. For example, in the consumer space Ben speaks to company
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 15Investment Outlook February 2021
management, competitors, suppliers, landlords, consultants, regulators, developers of
new technology, industry bodies, and investors, all of which have a unique picture of the
consumer sector. Furthermore, many of these contacts have overseas connections
which give a perspective of developing trends which are yet to reach Australian shores.
Building a Formidable Research Team
Ben has hired the best Ben is excited to be leading a new research team, which can be constructed properly
people from a diverse with a medium-term view of the future. Building a new team has allowed Ben to hire the
range of backgrounds best people, from a diverse range of backgrounds, who have different perspectives on
the world, a passion for their research, and who have a shared vision of Jarden research.
Ben observes that the nature of research is changing as the sectors and factors that
produce the next generation of returns will invariably be different to those of today.
Jarden’s objective is to lead the change. This will be achieved by:
1. Focusing on collaboration across the research team.
2. Utilising data, with an emphasis on differentiated and proprietary data sets.
3. Having research which is easy to digest.
4. Utilising external partnerships.
5. Having an agile approach to company coverage.
Identifying new themes Consequently, the Jarden Australia research team will spend more time on producing
early and challenging differentiated research and less on maintenance research, which simply extrapolates
current thinking will be a what is currently happening adding limited value. Identifying new themes early will be
hallmark of the team’s critical and challenging current thinking by looking at it from a new perspective will be a
research hallmark of the team’s research.
Coverage Target
Jarden’s Near-term
Target will put it in
the Top 3 by
Australasian
Research Coverage
Source: Jarden
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 16Investment Outlook February 2021
Top Stock Picks – 2021
Key Takeaways New Zealand Equities
• NZ Equities:
AFT Pharmaceuticals (AFT.NZ) Price $5.13 Rating: Outperform
- AFT
- Heartland
Why? We have higher confidence in AFT’s organic growth outlook, in particular the
- Mainfreight
continued momentum across the Maxigesic product suite and steady growth in the
- Pushpay
Australasian product portfolio. The simplified capital structure also helps to underpin
- Z Energy
strong valuation support.
• Australian Equities:
Investment thesis? Management have maintained guidance for FY21 EBIT $14-$18
- Appen
million despite the challenges so far. A more exaggerated skew to 2H21 is expected as
- Harmoney
Covid-19 complications from a disrupted 1H ease. Importantly, the monthly run-rate in
- Ramsay
early 2H was up on the previous year. We also expect the company sales pipeline to build
- Wisetech
with an acceleration in the number of new countries AFT is selling into. Furthermore,
- Worley
Maxigesic IV is now registered in 20 countries (up from 17 in March 2020) but currently
• Global Equities: only sold in 3. This is expected to underpin robust revenue and earnings growth over the
- Alphabet medium term. Another pleasing development is the company intends to start paying
- BlackRock dividends in FY22 after achieving target net debt of $25-$30 million.
- Micron
Catalysts? News flow on outlicencing deals, uptake of Maxigesic IV and new
- Salesforce
developments of platforms NasoSurf and Pascomer, 2021 profit result in May 2021.
- Toyota Motors
- Unilever Key risks? Out-licensing execution, clinical trials, regulatory change and competition.
- UnitedHealth
- Walt Disney
Note: Prices as of 28 January. Heartland Group (HGH.NZ) Price $1.88 Rating: Neutral
Why? The outlook for the bank continues to improve with lower impairments (versus prior
expectations), solid cost control and higher interest income all supporting a strong
recovery in earnings.
Investment thesis? Heartland’s New Zealand business offers continued growth through
Motor, Business and Reverse Mortgages, while further growth in Australia is anticipated on
the back of expansion in Reverse Mortgages (currently 26% market share), Business and
Consumer activities. Digitalisation is expected to underpin the Bank’s offering, having
launched a residential mortgage platform that enables it to offer interest rates at materially
lower levels than the larger, more traditional banks. We expect this strategy to help build
scale and drive net interest margin expansion. Heartland now trades at a price-to-book
value multiple of 1.4x with a forward return on equity of 10.4%. This compares favourably
to the larger banks at 1.3x and 8.4% respectively.
Catalysts? Removal of the RBNZ’s dividend suspension, Australian Reverse Mortgage
growth, NZ credit/deferral progression, 1H21 profit result in February 2021.
Key risks? Resurgence in Covid-19 impairments, RBNZ capital adequacy rules, low
interest rate environment slowing retail deposit growth which pushes Heartland towards
higher cost wholesale funding.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 17Investment Outlook February 2021
Mainfreight (MFT.NZ) Price $68.40 Rating: Outperform
Why? Mainfreight is a high-quality business with solid operating momentum and a
defensive balance sheet. The thematic appeal is Mainfreight’s exposure to the global
economic recovery through increased freight activity.
Investment thesis? Mainfreight has been a major beneficiary of the pressure put on the
freight industry during Covid-19 driven by substantial share gains, greater essential
business mix, better line haul utilisation (especially on Australian regional routes) and
good cost control. As a result, the company reported underlying net profit growth of 23%
in 1H21. We expect ongoing growth for Mainfreight over the near-term, albeit with FY21
profit growth moderating to 11%, reflecting a combination of increasing network intensity
and utilisation, along with freight verticals exposed to better-than-expected underlying
consumer demand. In addition, European margins should benefit from a normalisation in
warehouse utilisation following a period of inventory contraction in this business.
Unsurprisingly, given the disrupted Covid-19 backdrop in the US, this business is likely to
remain the key detractor to overall group performance. We expect these headwinds to
subside in 2021 as progress is made on the vaccine rollout and activity levels recover with
the US election now in the past.
Catalysts? Interim trading updates, 2021 profit result in May 2021.
Key risks? Covid-19 lockdowns, an unsuccessful vaccine roll-out.
Pushpay (PPH.NZ) Price $1.68 Rating: Outperform
Why? We see Pushpay as well positioned for a structural growth opportunity driven by the
increasing share of digital payments in the US faith sector where it has a dominant share
Investment thesis? 2020 was been remarkable for Pushpay with Covid-19 significantly
accelerating the shift to digital giving, effectively compressing 3 years’ worth of growth
into one. As such, the company delivered 1H21 processing volume growth of 45%,
revenue growth of 53% and earnings growth of 178%. The key earnings driver has been
margin expansion which has grown to 31%, from 17% a year ago. This highlights the
significant operating leverage in the business. Given the strong cash generation (forecast
FY21 free cash flow yield of 3.5%) and expected pay down of debt, we forecast Pushpay
will return to a net cash position by 2H21. We are also optimistic on Pushpay’s more
targeted focus on the Catholic church segment where it is underrepresented and consists
of around 17,000- 20,000 churches.
Catalysts? New customer wins over the next 6-12 months and continued traction in
selling its integrated Church Management Software product.
Key risks? Slowing new customer growth, decline in US giving market, processing fee
compression, governance concerns, increased uncertainty surrounding the Huljich family
stake of 15.7% after Peter Huljich resigned from the board.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 18Investment Outlook February 2021
Z Energy (ZEL.NZ) Price $3.06 Rating: Outperform
Why? We are becoming increasingly confident in the new strategy management are
executing which should lead to a turnaround of the business.
Investment thesis? We believe the key reason why Z Energy appears so undervalued is
the low confidence investors have in management’s ability to execute. We are becoming
increasingly confident that management are now executing a strategy that should
reposition the business to return to earnings growth going forward. Recent trading
updates have confirmed our view with volumes tracking well (despite the lack of
international tourist demand), broadly steady margins and cost-out delivering. The
company has reiterated FY21 earnings guidance of $235-$265 million. While it has left the
door open to a possible 2H21 dividend, we believe the company would need to produce
FY21 earnings of $285 million to satisfy its debt covenants, which feels like a stretch.
Hence, the likely resumption will be after its 1H22 result in November. We believe the
prospect of a FY22 dividend of 24 cents per share (resulting in a gross forecast dividend
yield of 10.6%pa) will be the catalyst for the market to re-rate the share price.
Catalysts? Monthly volume data, 2021 profit result in May 2021 and any guidance around
dividend.
Key risks? Competitive pressures from the continued expansion of low-cost operators,
discounting and lower petrol margins. Other risks include Z Energy’s ability to retain cost
savings and NZ Refining’s desire to fast track the conversion to an import terminal.
Australian Equities
Appen (APX.AU) Price A$22.94 Rating: Neutral
Why? Appen collects and labels image, text, speech, audio, and video data used to build
and improve the artificial intelligence (AI) systems of its corporate (Facebook and Google)
and government customers. The big opportunity is more companies deploying AI or
complex machine learning algorithms.
Investment thesis? Appen’s market-leading scale positions the business well to capitalise
on this rapid sector growth. Covid-19 significantly disrupted Appen’s customers,
particularly in California, and new projects commencing. This resulted in an earnings
guidance downgrade in December to A$106-$109 million (from A$125-$130 million).
However, the industry backdrop remains favourable and we expect growth momentum to
bounce back over 2021-22. There remain short-term uncertainties over Appen's sales
pipeline however this appears factored into its lower share price which creates some
buffer. Furthermore, the 32% increase in the number of new and early-stage projects from
key customers is a testament to Appen's market-leading credentials.
Catalysts? FY20 profit result in February.
Key risks? Concern about Appen's lack of earnings visibility compared with domestic tech
peers.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 19Investment Outlook February 2021
Harmoney (HMY.AU) Price A$2.62 Rating: Buy
Why? Harmoney’s innovative marketing strategy through the advanced use of Google
smart bidding allows a targeted approach which yields significantly better returns than
traditional ad placements. This combined with its repeat customer program, sees it well
positioned to capitalise on the ongoing structural shift towards non-bank lenders.
Investment thesis? Harmoney is a leading personal lender in Australasia, providing
unsecured loans directly through digital channels. Harmoney’s share price has
underperformed since listing, potentially reflecting a more modest near-term growth
profile versus peers. The company made a conscious decision in the early Covid-19
period to limit originations in response to economic uncertainty. With originations having
bottomed in July 2020 and Harmoney reporting 2Q21 growth of 47% on the previous
quarter (NZ +44% to $89 million and Australian +69% to $27 million), we believe the
volume recovery is tracking very well. Harmoney has also derisked the funding side
further by securing a second NZ warehouse funding facility, increasing total capacity to
$264 million. Increased wholesale funding at a lower cost should underpin margin
expansion, allowing reinvestment into loan growth through sharper pricing. The
company’s customer acquisition process should continue driving operating leverage with
approximately 60% of originations coming from existing clients with lower acquisition
costs and impairments, therefore accruing significantly higher incremental margins.
Catalysts? Sustained volume recovery in line with peers and 1H21 profit result in February.
Key risks? Covid-19 led economic headwinds impacting volumes and impairments,
reliance on wholesale funding and higher interest rates over the medium term.
Ramsay Health Care (RHC.AU) Price A$63.89 Rating: Neutral
Why? Whilst we expect Covid-19 to continue impacting private health participation in a
negative way over the short term, we are more confident in the inevitable volume recovery
over the medium term and Ramsay’s ability to generate solid earnings growth through
brownfield developments, potential acquisitions, and cost savings.
Investment thesis? We remain confident Ramsay is well positioned to benefit from a
sustained pickup in elective surgery volumes over the next 1-2 years. Furthermore,
elective surgery wait list pressure in the public system could result in increased
outsourcing of work to private providers such as Ramsay, where capacity is not
constrained. The volume recovery in the UK and Europe is likely to be hampered given
the second wave of Covid-19 infections, but we expect government support programs to
be extended into 2021.
Catalysts? Further government support programs, a successful Covid-19 vaccine rollout,
1H21 profit result in February.
Key risks? Execution on brownfield developments, changes to government policy,
structural change of industry growth rates relative to history and unexpected tariff cuts.
Jarden Securities Limited | NZX Firm | www.jarden.co.nz 20You can also read
