Following the investing maxim that you should love stocks when they are hated, I regularly scan the daily readout of stocks and ETFs hitting 52-week lows. Most of the time these investments deserve the shrunken valuations they now merit. Yet on rare occasion, real gems will emerge—if you have a contrarian mindset.
That’s why my ears pricked up when I noticed the lone ETF focused on New Zealand, the iShares MSCI New Zealand Capped ETF (ENZL), is now bumping along at––or near––its 52-week lows and at levels last seen in late 2013. As a far as I knew, New Zealand was home to one of the world’s healthier economies. That apparent disconnect meant it was time for a closer look.
Steady As She Goes
New Zealand typically garners high marks from global investors: The country ranks among the top in terms of social progression (which covers basic human needs and measures of well-being); and New Zealand is the highest-ranked (i.e. least corrupt) country on the Transparency International corruption perceptions index. That’s why the World Bank cites New Zealand as the second-most business-friendly country in the world, behind only Singapore.
Key measures underscore the economy’s appeal. Unemployment has fallen from 6.7 percent in 2012 to a projected 5.3 percent this year. Unemployment rates are falling despite a fairly heavy flow of immigrants into the country, especially from Australia. And inflation is virtually non-existent.
That backdrop is fueling GDP growth in excess of three percent, an enviable rate for most developed economies. Moreover, external debt equates to 38 percent of GDP, the lowest level in 11 years, and well below the levels seen across Europe, Japan and the United States. And the country is now operating a budget surplus, a true rarity in an era of global budget deficits.
Yet beneath the headlines, concerns are growing that dairy exports––which represent 40 percent of all exports, with much of that going to China––have begun to materially slow. And that is having a ripple effect on sentiment, with recent surveys pointing to a slowdown in job growth.
To head off an economic slowdown, the New Zealand Central Bank cut a key benchmark interest rate for the first time since 2011, to 3.25 percent. Local economists anticipate another three rate cuts by year’s end.
And rate cuts tend to go hand in hand with a weakening currency. The New Zealand dollar (known as the “Kiwi”) has fallen sharply in recent months, to levels seen back in 2010, which in turn partially explains why the iShares New Zealand ETF is also plumbing fresh lows these days. Country-specific ETFs gain or lose value on a dollar-denominated basis as a local currency strengthens or weakens against the U.S. dollar.
Yet that is precisely the set-up that U.S.-based investors should be looking for when researching ETF country funds. A well-respected set of government and business policies, an economy poised to benefit from an interest rate cutting cycle, and a chance to buy such a country while it has a competitively-priced currency are all key virtues. The country’s role as an agriculture-focused exporter underscores the gains to be had from a falling currency.
The key question is whether New Zealand’s economy gets an immediate boost from rate cuts and a more competitive currency, or do investors need to have a more patient view of an economic rebound?