NZ Herald business editor at large

Liam Dann: Prospects gloomy for SOE floats


Many investors in Mighty River Power will be looking at its current depressed share price with a heavy heart.

Mighty River shares hit a fresh low of $2.20 on Friday as global markets took a pounding. Photo / Sarah Ivey
Mighty River shares hit a fresh low of $2.20 on Friday as global markets took a pounding. Photo / Sarah Ivey

Mighty River Power's dismal run on the sharemarket must be causing headaches for the Government it as it tries to organise the next state-owned power company float for later in the year.

Mighty River shares hit a fresh low of $2.20 on Friday as global markets took a pounding. That's a fall of 12 per cent from the $2.50 it listed at on May 10 and a big turnaround from the initial market exuberance which saw it spike to $2.73 on the first day of trading.

We all know Mighty River is a yield play. It is the sort of stock you should buy and hold long term and which pays for itself with a steady dividend stream.

But let's not pretend the current share price is not a bad look. Or that it won't be worrying and deflating to the many thousands of New Zealanders who dipped into the sharemarket for the first time on this offer.

After what initially looked like a pretty well-weighted float, things haven't gone right at all.

Suddenly it looks like the listing price was too high.

Analysts for three out of five brokers in the latest round of reports are picking it won't surpass $2.50 in the next 12 months. That's just a bit galling so soon after the float.

Was it greed or was it just a case of really bad timing?

Probably the latter, as the Government must have been hoping for a result which would help promote the next three asset sales to New Zealanders.

If the seller had had no stake in the on-going success of the listing the timing couldn't have been better. Markets were bullish after an extremely strong 12-month run on the back of a more stable world economy.

The float date for Mighty River, delayed from last year, coincided almost perfectly with the peak of this run.

Since then, perversely, concern about what happens as the United States economy improves has been rattling global investors.

Markets are funny things and can appear to behave dreadfully irrationally if you look at movements over a relatively short time.

In much of the commentary explaining the Mighty River share price fall, issues such as the opposition parties' power price policies and the Rio Tinto Tiwai Pt aluminium smelter are still cited, despite being well known and well documented before the float.

Weren't they priced in?

There has been no negative guidance from the company with regard to performance. Really nothing has changed from the point of view of the company.

But market sentiment has changed and that is very important to traders - unfortunately.

The weight that is put on the background issues hanging over Mighty River increases when big hedge funds and the like are more negative.

The global turbulence on markets in the past few weeks has changed risk profiles. Many international funds are moving cash back to the US and cutting investments in Asian markets - which include New Zealand and Australia.

When they look at where to cut their losses, those investments with extra red flags on them take a hit.

The severity of the market reaction to the comments of the US Federal Reserve governor Ben Bernanke has been a surprise. Everyone knew the end of the post-global financial crisis life support was nigh and Bernanke's time frame - easing off in the middle of next year - looks fairly predictable.

The shift on currency markets is understandable. The US dollar rises and the kiwi falls.

But quite why Wall St stocks slumped so sharply last Thursday has many experts scratching their heads.

The trouble is that we are still in completely new territory with these issues. The policies of the past five years are a giant experiment initiated in the heat of the moment as financial armageddon threatened the world.

The events of 2008 were so extreme is hard to keep them in focus five years on and all too easy to underplay them.

As good as the market strength of the last year has been. there is still an underlying fragility to things.

Europe is still in terrible shape and concern that China might overcorrect is also weighing in.

That doesn't mean the recovery is actually off the rails. This kind of turbulence was almost certainly unavoidable at some point.

It remains a case of two steps forward one step back. But for new investors this is a lot to digest.

It is worth noting not just equity markets are rattled. The New Zealand dollar is down 10 per cent since its late March peak at US86c.

Gold prices have been hit even harder. The hard commodity is down 23 per cent this year - more than any other investment class, according to Bloomberg News.

No one can tell you when to sell an investment but it is worth repeating the basic and general rule that playing the long game is the surest way to get good returns out of the market.

If you buy and sell like a trader you significantly up the level of risk involved.

There is no reason to assume that a long-term investment in Mighty River is any better or worse than a month ago.

Markets are fickle and quite where they'll be in two years, when the Government's bonus offer for long-term New Zealand holders kicks in, is anyone's guess.

But the current state of the market won't make the remaining market floats of Meridian and Genesis easy.

New Zealanders for whom the merits of investing are marginal will be more likely to get cold feet about buying. The goodwill there in the days after Mighty River floated has gone.

The hundreds of thousands who expressed an online interest in buying Mighty River shares but then didn't aren't exactly going to be kicking themselves.

The subtleties of listing Mighty River in a way that met all the Government's policy goals were always going to make it complex and difficult to get right.

The difficulties facing bankers looking to float Meridian and Genesis are now even greater.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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