Perhaps unbeknownst to many Americans, one of export-dependent New Zealand’s primary exports is milk powder. The nation’s status as a major exporter of milk powder to a swath of emerging markets, including China, is now in question after it was discovered that Fonterra said it sold contaminated whey protein to companies China, Malaysia, Vietnam, Thailand and Saudi Arabia.
China and Russia have since said they will halt imports of New Zealand-made milk powder. Logical thinking would conclude this should be bad news for the iShares MSCI New Zealand Capped ETF (NYSEArca: ENZL), but a deeper look at the the $152.4 million ETF indicates the opposite may actually be true. [ETFs For Fiscal Cliff Safety]
New Zealand’s dairy industry accounts for $9.4 billion in annual trade and milk powder exports represent 15% of GDP. Nearly 90% of China’s $1.9 billion in milk powder imports last year originated in New Zealand, reports Naomi Tajitsu for Reuters. To top it all off, China is New Zealand’s top export market.
With the Chinese economy showing signs of slowing, it would not be unreasonable to assume the last thing ENZL needs is a controversy that threatens New Zealand’s trading ties with the world’ second-largest economy. The lone New Zealand ETF has tumbled 10.6% in the past 90 days, suffering from many of the same problems as comparable Australia ETFs, including fears of Federal Reserve tapering and slowing Chinese growth. [Plenty of Culprits Plaguing This Currency ETF]
As it pertains directly to the milk powder flap, ENZL has no significant exposure to the consumer staples sector. Materials, discretionary and industrial names combine for about 48% of the ETF’s weight. Additionally, it cannot be overlooked that although shares of Fonterra plunged during Monday’s Asian session, New Zealand’s NZSE 50 eked out a small gain.
Another catalyst that could work in ENZL’s favor is weakness in the New Zealand dollar caused by the Fonterra debacle. In recent weeks, the International Monetary Fund and even New Zealand’s own prime minister have called the kiwi overvalued. ENZL is not a hedged currency fund, but New Zealand’s industrial firms have been clamoring for a weaker dollar. The Reserve Bank of New Zealand has not obliged, proving reluctant to lower interest rates or engage in quantitative easing, a stark departure from the game plan employed by other developed world central banks.
The industrial sector is 15.7% of ENZL’s weight. NZD/USD traded sharply lower in the wake of the Fonterra news. An alternative view is necessary, however. ENZL has recently shown a positive correlation with the New Zealand dollar. As the kiwi has faltered over the past three months, so has the ETF. In the past month as the kiwi has regained some steam, ENZL is up nearly 4.2%. ENZL does offer investors that are willing to embrace the currency risk some compensation in the form of a 30-day SEC yield of 4.32%.
iShares MSCI New Zealand Capped ETF
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.