New Zealand ETFs In Focus After Credit Downgrade

by on September 30, 2011 | ETFs Mentioned:

Investing in developed markets has been an extremely tough task as of late thanks to sluggish growth and debt woes in a variety of countries. In light of this, perceived ‘safe haven’ countries saw a great deal of inflows in this environment, leading to huge gains for markets such as Switzerland and other highly-rated nations. Yet, with the SNB’s historic decision to peg the franc to the euro, many investors scrambled to find new places to stash their cash in these troubled times, leading some to invest in nations such as those in the Asia Pacific or Nordic regions of the world. While this may have worked for a couple of weeks, it appears as though one of the key destinations for investors is no longer in the ranks of the safe haven club as New Zealand struggles with a downgrade to ‘AA’ by Fitch. 

In the move that hit the wires yesterday, Fitch slashed the island nation’s credit rating by a single notch thanks to worries about high external debt and the trade balance. The net external debt hit 70% of GDP at the end of the second quarter, while the nation’s current account deficit looks to balloon in the next two years, with analysts projecting an increase from just under five percent this year to 5.5% of GDP in 2013. “New Zealand’s high level of net external debt is an outlier among rated peers — a key vulnerability that is likely to persist as the current account deficit is projected to widen again,” said Andrew Colquhoun, Fitch’s Head of Asia-Pacific Sovereigns. The agency also downgraded the local currency rating for the nation to ‘AA+’ down from ‘AAA’ further highlighting the country’s diminished appeal as a safe haven [How You CAN Play The BRIC Through A Different Set Of Nations].

Yet, the news wasn’t all bad for the country as Fitch kept the outlook at ‘stable’ and also declared that “New Zealand remains well placed among the world’s highly rated sovereign credits, with its creditworthiness supported by moderate public indebtedness, fiscal prudence, and strong public institutions,” although one has to doubt that this softened the blow too much for the nation [see Top Three Currency ETFs of 2011].

In light of this news, New Zealand focused firms and the nation’s currency were under pressure during Thursday trading. For those looking to play this move or just to keep a closer eye on the situation, there are only a few options available for direct investment in the relatively small country. With that being said, there are still a couple of great options that provide quality exposure for those looking to invest in the country, both from a currency and equity perspective. We take a closer look at these two choices below as well as how they have been performing in light of this bearish news:

iShares MSCI New Zealand Investable Market Index Fund (ENZL)

This fund, which just celebrated its one year birthday, tracks the MSCI New Zeland Investable Market Index which is a free-float adjusted market capitalization weighted index designed to measure the performance of equity securities in the top 99% by market capitalization of equity securities listed on stock exchanges in New Zealand. In terms of top holdings, the fund is heavily exposed to materials (21%), telecoms (17.7%) and consumer discretionary (14%) although industrials, utilities, and financials all make up at least 10% of the fund as well. This suggests a pretty well diversified product considering that only 23 holdings are in the fund. For performance, ENZL was down about 1% in New York trading immediately following the news and it was also trading on volume that was about two times a normal day. This weakness continues the recent trend for the iShares fund as ENZL has fallen by about 1.8% over the past week and close to 10.6% in the past month alone [see holdings of ENZL here].

WisdomTree Dreyfus New Zealand Dollar Fund (BNZ)

For investors seeking exposure to the New Zealand dollar, also known as the ‘kiwi’, BNZ is the only real choice available. The fund is actively managed and seeks to achieve total returns reflective of both money market rates in New Zealand available to foreign investors and changes in value of the New Zealand Dollar relative to the U.S. dollar. Current holdings consist of mostly Treasury bills (77%) although repo agreements (21%) make up a sizable chunk while the remainder is tied up in money markets. Immediately following the announcement of the downgrade, BNZ fell by about 1.5% on volume that was about three times a normal trading day. These losses added to the recent weakness for the kiwi dollar against the greenback as now the fund is down 9.8% over the past month including a 2.1% loss in the past five days. However, it should be noted that this weakness is somewhat of a reversal of earlier in the year when the product showed significant strength against the struggling American currency. In fact, despite this rough stretch over the past month, BNZ’s year-to-date performance is showing a loss of just 0.4% since the start of January, suggesting that up until recently, the product had been doing quite well [see more on BNZ's Fact Sheet].

[For more ETF news sign up for our free ETF newsletter.]

Disclosure: Long ENZL, photo is courtesy of Joseph Watkins.