New Zealand ETF: Post-Quake Opportunity?

by on March 10, 2011 | ETFs Mentioned:

Last month a massive earthquake struck the New Zealand city of Christchurch on the country’s south island, killing more than 160 people and causing widespread destruction. The country’s equity markets took a beating in the wake of the natural disaster, plummeting as concerns spread that the quake would grind an already fragile recovery to a halt. According to government estimates, the clean-up could cost as much as NZ$ 15 billion, considerably more than the costs associated with a September tremor because the more recent disaster hit the city’s central business district.

The Treasury department estimated that economic growth in New Zealand would be 1.5 percentage points lower in 2011 as a result of the quake, a significant decline for an economy that is in danger of entering its second recession in as many years. Finance Minister Bill English indicated that the impact of the quake combined with slower economic growth than predicted could drop GDP by as much as NZ $15 billion through 2015, with the loss of tax revenue totaling NZ $5 billion over a five-year period. With the New Zealand economy struggling to post positive growth figures and get back on track following the recent recession, the devastating quake couldn’t have come at a worse time [see all the ETFs that offer exposure to New Zealand].

Yet there are signs that economic activity is picking up. Chinese imports of New Zealand milk have jumped dramatically, a trend that could continue as Asian consumers increase protein intake in lock step with jumps in discretionary income. Milk accounts for close to a quarter of export earnings in New Zealand, marking a huge opportunity to make up for quake-related shortfalls. More generally, the steep run-up in commodity prices over the last several months should be a boon to resource rich New Zealand, where the agricultural sector accounts for a big portion of total economic activity [How Investors CAN Play The BRIC Through A Different Set Of Country ETFs?].

The Finance Minister for one has become more optimistic on the outlook for the country. “We’re likely to see growth rates lift above 4 percent next year, on average across the economy,” English told parliament in reply to a question about the economic impact. Still, New Zealand stocks haven’t recovered from the damage done by the earthquake, lagging behind broad developed market indexes:

Country-specific ETFs often respond to natural disasters, and recent history has shown that there can be attractive buying opportunities in the aftermath. Last March, the Chile ETF (ECH) sunk after a devastating quake hit the South American country. But prices rebounded quickly after a competent government response, and investors who bought in during the headline-driven sell-off realized a nice profit.

New Zealand ETFs In Focus

With New Zealand equities losing ground to other developed economies and the country’s currency down sharply against many of its major rivals, some investors are sensing attractive entry points for asset classes that seemingly maintain bright long-term outlooks. ETF options for exposure to New Zealand include:

  • iShares MSCI New Zealand Index Fund (ENZL): This ETF offers exposure to a basket of about 25 New Zealand stocks, with the materials (23%) and telecom (18%) sectors accounting for the biggest allocations. ENZL has struggled in recent weeks, but export strength and strong commodity prices could give this fund a boost if the central bank is able to implement the proper monetary policies [see holdings of ENZL here].
  • WisdomTree Dreyfus New Zealand Dollar Fund (BNZ): This ETF offers exposure to the New Zealand dollar, which has stumbled against the greenback this year. With the country’s key interest rates in question due to efforts to speed up a recovery, BNZ could see more big moves in coming sessions [see charts of BNZ here].

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Disclosure: No positions at time of writing.