Continuous Disclosure: What really drives markets? Saudia Arabia's Aramco shapes as biggest IPO yet

Weather can play a part in what drives markets, a study has found. Photo / Hawke's Bay Today

COMMENT:

In today's edition:

• Extreme heat puts burn on shares.
• The biggest IPO yet?
• F&P on a roll.
• Property trucks on.

Ever wondered what really drives markets?

According to an international study, it's the weather.

It turns out that extremely hot weather leads to declines in market value of shares on the stock market, according to research from Victoria University of Wellington, the University of Otago and the University of California, Davis.

The study quantifies the impact of extreme heat events on corporate market values in public companies in the United States but it has lessons for New Zealand, according to associate professor Martien Lubberink from Victoria University of Wellington's School of Accounting and Commercial Law.

Lubberink teamed up with Professor David Lont from the University of Otago Business School and Professor Paul Griffin from the Californian university.

Lont said the research suggested equity markets are recognising weather-related climate risks but are underestimating their financial impact.

The researchers used National Oceanic and Atmospheric Administration data on thousands of heat events - from what is considered "extreme" by local standards to weather disasters with a cost in excess of US$1 billion - between 2003 and 2017.

Then, by layering the timing and geography of these events with the main location of public companies' operations, they were able to measure the equity markets' response.

Researchers found equity markets experienced a 0.42 per cent loss in the first 20 days after the beginning of a heat wave, and more if it continued.

Wineries are among those companies most exposed to extreme hot weather. Photo / NZ Herald

Investor losses grew to 1.38 per cent for more severe weather events, and smaller firms were more vulnerable.

The most exposed firms lost 1 to 2 per cent of their market value.

Researchers found a more negative response from investors in the most recent years of the study, as extreme weather events and climate change gained more media attention.

"That suggests investors are increasingly incorporating an assessment of weather-related climate risk in pricing future equity returns, but that risk is still underpriced," Lont said.

"All things being equal, the risk to the industry from extreme weather events would be understood and priced accordingly but the drop in value after an event shows that is not the case.

"The investors are the likes of pension funds and insurance companies, so it's pretty important that they understand the risk profile of the companies they are investing in."
Lubberink said the research was particularly relevant to any companies exposed to extreme hot weather, such as wineries, agricultural businesses and power generators that rely on hydro-electric sources.

The study, to be published in the December issue of Weather and Climate Extremes, is one of the first to examine and quantify the impact of extreme heat events on corporate market values.

The study also shows that this type of climate risk is local.

Smaller firms were more vulnerable to losses from events in their region than were the big firms with operations in different localities.

"The study has implications for New Zealand and Australian firms and fund managers who need to manage this risk," Lubberink said.

The Biggest IPO yet?

Preparations are under way for what could turn out to be the world's biggest initial public offering (IPO) in the form of Saudi Arabia's Aramco.

A man reads Aramco's twitter page at a coffee shop in Jiddah, Saudi Arabia. Photo / AP

On most estimates, the IPO will value Aramco higher than any other listed company in the world, even if it falls far short of the US$2 trillion mark that Crown Prince Mohammad bin Salman has targeted, the Financial Times said.

Its nearest rivals - Apple and Microsoft - are worth just over $1 trillion.

But crucially, only a small fraction of Saudi Aramco will actually be floated.

Reportedly, shares worth up to 3 per cent of the company will be listed on Saudi Arabia's stock exchange – plans to list a far larger share and to involve foreign stock exchanges are still a long way away, the FT said.

If Saudi Aramco were to be valued at, say, US$1.5 trillion, then 3 per cent it would be worth US$45 billion.

That would still be well ahead of the previous largest-ever IPO, Alibaba's US$25bn offering in 2014.

And would give it a share of about 25 per cent in MSCI's benchmark index of Saudi Arabia's equities, the paper said.

F&P on roll

Shares in Fisher & Paykel Healthcare are on a roll, cracking $20 a share for the first time.

The company last month revised up its earnings forecast after receiving regulatory clearance to sell a new, full-face obstructive sleep apnea (OSA) mask in the United States.

Assuming a NZ/US dollar exchange rate of about 63 cents for the balance of the year, the company expects full-year operating revenue to be about $1.19 billion and net profit after tax to be in a range of $255 million to $265m, up from a previous guidance of between $245m and $255m.

F&P Healthcare, NZX trading. Source: Yahoo Finance

Shares in F&P Healthcare this week hit $20.02, having finished last year at just $11.85.
The company's first half result is due on November 27.

So is property

Property stocks have put in a strong performance over the year, as reflected in the S&P/NZX Real Estate Select Index.

Harbour Asset Management portfolio manager Shane Solly said the index reflected a solid economy supporting tenant demand for space and modest level of new development.

In interest rate cuts by the Reserve Bank had attracted investors to the asset classes that offered relatively high and stable income yield, he said, but capital raising by Goodman Property and Kiwi property may have sated near-term investor demand, he said.

"Further Reserve Bank official interest rate cuts and trading bank cuts to term deposit rates may see investors revisit the asset class," he said.

"But investors need to be selective – not all property securities are the same – with a 44 per cent difference in return between the best [Augusta] and worst performing [CDL Investment] index member year to date," he said.