There were three obvious sectors which were almost exclusively exposed to the New Zealand domestic economy, Craigs Investment Partners broker Chris Timms said.
There were certainly more than three sectors with high domestic exposure but some of the others, such as the electricity retail/generators and retirement village operators, were not considered as highly cyclical.
Retail, property and construction were the most likely ones to be affected by any slowing in the domestic economy, he said.
The majority of retail stocks listed in New Zealand derived their revenue solely from the domestic market.
They included The Warehouse, Hallenstein Glasson, Briscoe Group and Kathmandu, although Kathmandu only had 30% of its revenue coming from New Zealand.
Given a large portion of the products those companies sold could be regarded as discretionary, the performance of the economy could have a material impact on their performance.
Beyond the cyclical economic exposure, the proliferation of online trading was a problem the sector had to deal with, he said.
"We remain cautious on the sector at this point."
There were 11 listed property companies in New Zealand. Of those, only one, Vital Healthcare, had assets outside New Zealand.
"While we acknowledge listed property companies diversify risk across sectors and locations, they are still highly exposed to the performance of the domestic economy."
During periods of slow economic growth, occupancy levels tended to fall and rent rises were harder to push through, leading to falling rental incomes, Mr Timms said.
A secondary impact would be assets being revalued down. New Zealand property companies were largely exposed to the industrial, office and retail sectors.
Three New Zealand-listed construction companies had major exposure to the sector — Fletcher Building, Metro Performance Glass and Steel & Tube.
Despite experiencing a construction "boom" following the global financial crisis, all three companies had been unable to take advantage of the highly favourable economic backdrop, he said.
With the construction cycle having peaked, maintaining earnings growth at a time when helpful conditions were beginning to reduce might be more difficult.
The chief executives of those three companies had resigned in the past six months, following numerous profit downgrades.
"Sector valuations appear attractive at present but lack of execution and the current point of the construction cycle warrants caution."
The two quality domestic companies Craigs liked were Freightways and Trade Me.
Freightways derived about 80% of its revenue from the New Zealand market and a large portion came from its express package and business mail segment. The company held about a 40% share of the New Zealand parcel market. With the proliferation of online sales, parcel volumes were likely to grow.
Sentiment towards Trade Me had been relatively negative lately, largely driven by the entry of Amazon into the Australian market, Mr Timms said.
"We certainly acknowledge Trade Me faces risks from any slowdown in the New Zealand economy. But the company has solid brand equity, a technology platform which continues to improve and the current valuation is not overly demanding."
Z Energy and New Zealand Refining were two companies with moderate cyclical risks but long-term structural issues, he said. Z Energy’s revenues came mainly from the sale of fuel, and a small portion coming from retail sales and refining.
Fuel was categorised into petrol, diesel and jet. In 2017, petrol sales grew by 3% and diesel grew by 6%. Both of those were driven by the combination of economic impacts of migration and a buoyant economy. Jet fuel sales grew by 20%, driven by growth in fuel used at Auckland Airport.
New Zealand Refining was also affected by changes in fuel volume demands.
Two companies with a high degree of cyclical consumer exposure were Heartland Bank and Turners Automotive, Mr Timms said.
Given Heartland lent to New Zealand consumers, businesses and the rural sector, any slowdown in the economy was likely to result in slower loan growth. Bad debts could begin to rise.
Heartland had done a good job of executing its staged strategy and building market credibility, he said.
Its earnings growth expectations were well ahead of its larger Australian peers. However, near-term growth appeared priced in at current levels.
Almost all of Turners revenue and earnings came from New Zealand markets. The company had three income streams — automotive retail, finance and debt collection.
Vehicle sales tended to be cyclical, albeit used vehicle sales were less than new vehicles. Turners dealt only in used vehicles.
Turners was feeling the benefits of its strategic decision to develop a business model with the finance and insurance segments leveraging off the automotive retail segment.
"While we think the company’s strategy is sound, any economic slowdown would have a subsequent impact on the earnings of Turners."
