Investors should brace for a more challenging year in 2022, as the world battles to get ahead of Covid variants while also facing up to a growing challenge from inflation.

“We expect the coming year to be tougher for investors, so we’re preparing for higher volatility, more modest returns and a greater divergence between winners and losers,” says Craigs Investment Partners head of research Mark Lister.

“The easy part of the post-pandemic recovery is behind us, and the tailwind of easy monetary policy is becoming a headwind as central banks look to reduce stimulus and raise policy interest rates.”

Of course, for those focused on the local sharemarket, these will be familiar themes – 2021 wasn’t exactly easy either.

While Wall Street managed to largely shrug off Covid and inflation woes to keep hitting record highs through the year, New Zealand’s S&P/NZX 50 index struggled and mostly tracked sideways.

Our Brokers’ Picks game – by virtue of its timing (from December to December) has the index in the black – but only just (up by 0.9 per cent).

But if we ignore dividends and look at the calendar year, then New Zealand shares are down more like 4 per cent in 2021, compared with the US, which is up 23 per cent, and Australia, up by more than 10 per cent.

Whichever way you slice it, the squeeze on the NZX was pronounced.

“This was due to the marked increase in underlying interest rates in the last 12 months,” says Grant Davies at brokers Hamilton Hindin Greene.

“The Reserve Bank of New Zealand is one of the few in the world that have begun increasing interest rates, which makes New Zealand an outlier among its global peers.”

But, he says, “the fact that the NZX has led the charge in terms of adjusting to a higher interest rate environment means the market is relatively well placed heading into 2022.”

Lister agrees.

“Markets are fully expecting a string of OCR hikes in 2022, to the point where they might’ve even gotten a little ahead of themselves,” he says.

“We’re also comforted by the fact that the local sharemarket has been such a laggard over the past 12 months, and that it remains somewhat out of favour.

“There isn’t much enthusiasm baked into our market, which means it could prove more resilient than people think.”

Here’s hoping.

The top picks:

For 2022, our brokers have spread their picks more widely than in previous years.

But one stock takes pole position as the most popular choice for 2022. Local bank Heartland has been picked by four participants.

A registered bank since 2012, Heartland was the first New Zealand-registered bank to be listed on the main board of the NZX, in 2015.

It has been a strong market performer since the Covid crash in March 2020 and was up 54 per cent over the 2021 Brokers Picks’ game period.

MSL Capital Markets’ Andrew McDouall puts the reasons for his pick plainly: “Banks make even more money when interest rates start going up,” he says, noting that Heartland has done a good job of carving out profitable niches left by the overseas-owned banks.

Jarden’s Adrian Allbon agrees, saying Heartland has captured strong receivables growth from areas like motor financing and its reverse mortgages proposition on both sides of the Tasman.

“Given the unknowns of how the economy will progress with re-opening, we note from a balance sheet perspective the group [Heartland] is still in excess capital, and offers a strong dividend yield.”

Hobson Wealth’s Mark Fowler says Heartland could “offer growth above system next year as access to traditional credit tightens”.

“The stock is known for its reverse mortgage business, quality motor loan book and large digital footprint. Capital reserve regulations will also play in [its] favour.”

Two other stocks stand out as popular this year – each having been chosen by three firms. They are EBOS Group and Fletcher Building.

EBOS – one of Australasia’s largest diversified pharmaceutical and veterinary products groups – was one of the star performers of 2021 (see results below), returning 37.6 per cent.

“[It] is a well-run business with a defensive earnings profile and market-leading positions across a number of its core segments,” says Forsyth Barr head of research Andy Bowley.

“EBOS has expertly managed the Covid-19 volatility to date and we are attracted to its track record of execution, strong cash conversion, market-leading positions, and positive underlying organic earnings momentum (across both its animal care and healthcare segments).

“EBOS is simply one of those businesses that delivers year in, year out, so it never looks out of place in a list like this,” says Lister.

Fletcher Building’s popularity seems notable simply because it was once a go-to blue-chip bet for this game, but has been out of favour for several years.

After confronting some serious structural issues through the past five years, it has seen a strong turnaround in market performance and looks well-placed for the year ahead.

“Fletchers have benefited from a change in leadership and a streamlining of the business,” says Hamilton Hindin Greene’s Grant Davies.

“They are also set to benefit from a continuation in new builds, both residential and commercial.”

He notes that some regulatory risk remains, given the size of the company’s market share in some areas of the housing supplies market.

“But their scope in that area is also attractive from an investor’s point of view.”

MSL’s McDouall cites “continued strong construction with the likely government pre-election spending likely to underpin earnings in both 2022 and 2023”.

Another two stocks were picked by two firms – Infratil and Contact Energy.

“Infratil have a great track record and offer investors diversified exposure to some attractive sectors with long-term tailwinds – renewable energy, healthcare and data storage,” says Davies.

“They complement their more growth-oriented investments with strong cashflow investments which include Trustpower, Wellington Airport and Vodafone NZ.”

Jarden’s Allbon notes the company’s strong track record.

“Infratil is our preferred growth infrastructure stock. We’re expecting good underlying net equity value growth from its core assets – Canberra Data Centres (CDC), Vodafone NZ and recent healthcare acquisitions,” he says.

“It also has additional growth and return opportunities available through its investments in a global renewable energy platform, and Trustpower (post-retail segment divestment).”

Of Contact, Allbon says the power company has a high-quality asset base and “the best optionality around future generation through its access to geothermal”.

“It never hurts to own an electricity company or two,” says Craigs’ Lister.

“They are very defensive – almost recession-proof – and they offer very stable cash flows and dividend yields. We think the sector has more pricing power than some believe, which means it’ll be able to maintain margins in the face of higher inflation.”

Beyond these there are a huge range of stocks in the spotlight for brokers next year.

Some, like a2 Milk, had a rough 2021. But a2 still warrants a pick from Hamilton Hindin Greene, which sees the milk company as well placed for a turnaround.

“The company’s brand strength will be key in the very competitive Chinese infant formula market, however if they can maintain and start to grow market share in the region then we expect to see the share price follow.”

Other’s picked for a change of fortunes in 2022 include Sky TV and Sky City.

The 2021 results:

Given the tough year on the NZX, some of our game players still managed stellar results.

This year’s Brokers’ Picks winner is Jarden, which managed an average return of 33 per cent, with all five of its chosen stocks in the black.

The standouts for Jarden were Turners Automotive, Mainfreight and EBOS.

Forsyth Barr, in second place, had the second best performing stock of our 2021 picks, Skellerup – up 79.4 per cent.

In third place, Craigs Investment Partners also picked Mainfreight and EBOS but saw its average returns eroded by Ryman, which had a tough year – down 13.5 per cent.

A few players saw some big hits and misses in their picks. Hobson Wealth had the surprising top stock in the game – The Warehouse, up 80 per cent. But it saw its average pulled down by a2 Milk, which had one of its toughest years as a listed company – down 47.4 per cent.

The dairy company was a high flyer in 2018 and 2019 but has struggled since the pandemic hit.

Disclaimer – It's a game

Readers should recognise that the results of the Brokers’ Picks are skewed by some features of the game. The figures exclude brokers’ fees. Percentage changes are total shareholder return (share price performance and dividends) for the game period, sourced from IRESS.

Brokers are asked to choose the securities that will give the best short-term performance. If they had been asked to choose, for example, a five-year term, the results might be different. The survey does not allow brokers to review choices during the year. The survey implies a one-size-fits-all approach. It takes no account of individual circumstances such as an investor’s appetite for risk, need for income or tax circumstances.

The views expressed do not constitute personalised financial advice and are not directed at any person. Some shares picked may include shares held by the company’s directors and staff. Finally, past performance is no guarantee of future performance.

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