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Like many stock exchanges globally, the New Zealand stock exchange continues to emerge from the COVID-19 pandemic-induced trough of 2020, although volatility remains as the pandemic drags on and as markets face new challenges such as the ongoing geopolitical tensions in Europe.

NZX had a lackluster year in 2021

The NZX 50 ended 2021 flat at 13,033.77, marginally down from 13,091.64 at the end of 2020 after nine consecutive years of growth. The capital market’s lackluster performance came as the New Zealand economy grew at a weaker-than-expected pace in 2021.

Data from the NZX (NZE:NZX) showed that the total value of stocks traded last year fell 2.4% year over year to NZ$52.4 billion, significantly weaker than the 41.8% jump in 2020.

NZX50 D1

Still attractive for IPOs

However, the NZX remained appealing for initial public offerings and secondary listings in 2021, with the value of new capital listed and raised rising 12.1% to $19.8 billion. The bourse hosted the IPOs of nine new companies last year. In 2020, total capital raised from IPOs fell 5.5% to NZ$17.6 billion, with only eight new additions to the NZX.

Last year, local meal kit home delivery service platform My Food Bag (NZE:MFB) launched the biggest IPO in the country in seven years, raising NZ$342 million and valuing the company at close to NZ$450 million.

NZX, in its annual report, attributed the increase in the number of first-time listers last year to some changes that it carried out including reducing the complexity and costs of IPO applications.

This year, New Zealand’s IPO pipeline is not looking as rosy as last year with no major rumors of a potential listing.

Globally, the lingering pandemic and geopolitical shocks are expected to weigh on investor appetite for new listings, according to PwC’s 2022 outlook. However, the accounting firm noted that "optimism remains high that vaccines and other mitigation strategies can prevent widespread lockdowns, keeping equity markets steady and maintaining the environment many prospective companies seek when going public.”

Higher volatility looms for 2022

Investors will have to buckle up for a wild ride this year as markets emerge from post-pandemic recovery and as central banks tighten their monetary policies in response to higher inflation. At home, the Reserve Bank of New Zealand expects the official cash rate to climb 2.5% in the next 12 months before peaking at 3.25% at 2023-end.

Best stocks for NZX’s growth

Despite market challenges, the NZX is poised to benefit from the strong performance of some high-performing stocks with stellar balance sheets, high profitability, and strong free cash flow generation.

SKY Network Television (NZE:SKT) is among the best performers on the NZX. The stock bounced strongly in the first quarter of 2022, surging 56% over the past year as of Wednesday. The broadcast company recorded better-than-expected earnings in the six months ended Dec. 31, driven by strong customer growth after the company offered promotions during COVID-19 lockdowns.

Steel Tube (NZSE:STU) is another growth driver for the NZX as the company cashed in on higher steel prices despite supply chain pressures, with its recent half-year profit tripling.

EBOS Group (NZE:EBO), whose shares surged to an all-time high in January, is also off to a good year as the healthcare company posted another record first half recently owing to its diversified portfolio of healthcare and animal care products.

The NZX may also see a boost from other high-performing stocks including fuel distributor Z Energy (NZE:ZEL), logistics firm Mainfreight (NZE:MFT), utilities firm Contact Energy (NZE:CEN) and renewable energy company Infratil (NZE:IFT).

Trans-Tasman bubble a dream?

There have been talks for a Trans-Tasman bubble since the Coronavirus lockdowns in March. However, different approaches from New Zealand and Australia have made this reality more a far fetched dream.

Trans-Tasman bubble would greatly help both economies

Although both countries would benefit from the trans-Tasman bubble, New Zealand would arguably benefit greater due to 5.8% of GDP being attributable to Tourism. Over 180,000 individuals are employed due to tourism and make up about 7.5% of the workforce in New Zealand.

However, as much as a trans-Tasman bubble is encouraged, the difference in approaches has made it challenging to implement. With New Zealand digging their heels and imposing one of the strictest lockdowns in the world, while Australia gave their citizens relative freedom, only imposing social distancing guidelines. The contrasting methods have become evident – with Australia still making records in daily Coronavirus cases, while New Zealand consistently records single-digit case numbers. Victoria, Australia, reported 428 new Coronavirus cases on Friday, making it the state's largest daily increase since the pandemic.

This is on the back of the Prime Ministers' Scott Morison and Jacinda ADern opening up travel between the two countries. Scott Morison stated that "she [Jacinda Adern] raised the very issue [the bubble] with me, and we're progressing those discussions." However, he also stated that it is "going to be a little be moderated for what's happening in Victoria," insinuating a possible exclusion for citizens that live in Victoria. Melbourne, a major city in Victoria, recently hit 5000 Coronavirus cases as the city re-enters a second lockdown.

Trans-Tasman may move the needle in the markets

The AUD/NZD depreciated to parity in the middle of March as risk currencies dived – with the NZD showing some strength due to New Zealand's efficient suppression of the Coronavirus. However, the Australia dollar has since rebounded, trading at the 1.067 level. There may be an argument for the Australian dollar is slightly overvalued compared to the New Zealand dollar as New Zealand's economy has been restarting without any relative setbacks. However, as demand for commodities such as oil and iron rises across the world of which Australia is a major exporter, demand for the Australian dollar may increase, strengthening relative to the NZD.

AUS200 in Blue, NZX 50 in Red

However, the significant indices for Australia and New Zealand may show outperformance, rewarding New Zealand in their Coronavirus suppression. Since their March lows, the NZX 50 has outperformed the Australian 200 Index by 4%. If New Zealand continues to outperform with regards to the Coronavirus relative to Australia, we may see a good opportunity to shorten the ASX and go long the NZX.

If both countries took the same approach, I believe there would have been a trans-Tasman bubble sooner. Australian Tourism Industry Council Executive Director Simon Westway stated that "Australia needs to get back on its feet before Trans-Tasman bubble," and that Australia needs to open its domestic borders between states before opening up to New Zealand. Jacinda Adern took a stab at Australia's Coronavirus response, stating on video that "If Australia wants a whole country trans-Tasman bubble, we'll be waiting."

Invest in the macro-environment, or the business?

The AUS 200 and the NZX 50 are down 12.62% and 3.16% year to date. This is in comparison to the NASDAQ, which is currently up 10.08% for the year. A stark contrast is considering that Australia and New Zealand have had a better Coronavirus response than the United States.

AUS 200 In Blue, NZX 50 in Red, NASDAQ in Orange

New Zealand has been touted as having one of the best initial reactions to the Coronavirus. However, critics in the early stages of the loosening of lockdown compared New Zealand to Australia as having similar results but with fewer restrictions. But as citizens started experiencing freedom, it became evident which country had the upper hand.

Coronavirus impacts even the strictest of countries

When asked if he shared the same view of Qantas CEO Alan Joyce on low overseas travel for at least 12 months, Australian Prime Minister Scott Morison stated that it was "not unreasonable for Alan Joyce to form the view he has." The Australian government hinting that they will not reopen borders until the middle of 2021. This is on the back of Australia, posting the most significant one day rise in Coronavirus cases in two months. Australia has recently experienced a surge in Coronavirus cases as people resume their daily lives.

However, New Zealand has not had a perfect ride either. The government has been getting criticism for releasing quarantine patients without checking them for Coronavirus.

With both countries' shortfalls, they both have performed relatively well in the crisis, sacrificing the Economy for their citizens' health. Coronavirus fatality rates for Australia and New Zealand have been meager at 1.38% and 1.88%

If we compare this to the United States, the fatality rate is 5.1% and over 2.47 Million Coronavirus cases. With the White House having no clear plan with the Coronavirus and a President game theorizing his way to a successful election in a couple of months, this has put pressure on states to reopen. This is on the back of daily cases surging.

Company or Country?

However, the NASDAQ is outperforming both the ASX 200 and the NZX 50 despite these conditions. This begs the question, should we be investing in the macro picture, or should we be investing in companies? This is a tough call, as companies such as Facebook and Google have a non-cyclical business with a fortress-like balance sheet, while companies in A2 Milk and After pay in Australia have better macroeconomic conditions. There may be value in preparing for America's second wave and looking at equities and investment down under. The divergence may become evident in the possibility that America goes into lockdown again.

This also may be an opportunity to enter a long position in the New Zealand and the Australian dollar on higher demand for the currencies as investment rush into the NZ and Australian markets.