Brian Gaynor: Professional nudge helps market move

One of the regular features of the New Zealand sharemarket is end of quarter price manipulations by fund managers and brokers.

The object is to push up share prices so that fund managers can report better performances.

As the accompanying table shows, the NZSE40 capital index rises on the last day of the quarter and usually falls the following day, a change particularly pronounced at the end of the latest June quarter.

The Ministry of Economic Development released a discussion paper on market manipulation last year. It specifically mentions price manipulation to support portfolio valuations, which it calls "marking the close" or "window dressing".

Market manipulation is an offence in many countries and the ministry is expected to make an announcement on this issue in the next few months.

The arrival of market manipulation legislation could signal the end of a well-established market tradition - the end-of-quarter surge.

Interest rates

Interest rate falls can create problems, particularly in New Zealand.

The country's M3 institutions, predominantly the major trading banks, have $142 billion of deposits and $176 billion of lending, with shareholders' funds and other liabilities accounting for the difference between the two figures.

When interest rates fall borrowers feel better off and depositors disadvantaged.

For the household sector the net impact of interest rate falls is positive because individuals have $81 billion of trading bank borrowings and only $51 billion of deposits.

But low interest rates create a boom environment for fringe finance companies as depositors become frustrated with the low interest rates offered by banks and are attracted to fringe finance companies, offering higher rates.

There are potential problems associated with the burgeoning finance company sector.

Many of the depositors are retirees who are highly dependent on investment income and are attracted by the high interest rates finance companies offer.

Elderly depositors may not be aware of the risk. Many of them don't read prospectuses, they are unaware when finance companies have a large exposure to high-risk property projects and there is no recognised credit-rating agency that assesses the credit worthiness of borrowers.

Some of the newer and smaller finance companies seem to have a large amount of related party loans.

New Zealand also has a self-regulatory regime, as far as the finance sector is concerned, and there is nowhere for depositors to turn to if a financial institution fails.

At this stage there has been no major failure, but it is highly probable that some finance companies will go under in the next few years, particularly if there is a downturn in the property sector.

Depositors who are attracted by high interest rates should ensure that their investments are spread amongst several finance companies.

Trans Tasman Properties

Trans Tasman Properties shareholders have an anxious wait as the use of the proceeds from the sale of its Australian properties is decided.

But there are encouraging signs that the poor performance of its Hong Kong parent could be the catalyst for a major capital repayment to shareholders.

Trans Tasman Properties is 55.2 per cent owned by Hong Kong-based Sea Holdings and the New Zealand company has a 50.1 per cent shareholding in Australian Growth Properties (AGP).

AGP shareholders will meet on July 25 to approve the sale of its major Sydney properties for A$397 million ($450 million).

These properties account for some 80 per cent of the Australian company's assets and 46 per cent of Trans Tasman's assets.

The New Zealand company is also required to obtain shareholder approval for the sale but the Market Surveillance Panel has granted it a waiver because Sea Holdings has indicated that it would vote in favour of the motion.

After the sale AGP will have an estimated A$266 million ($301 million) in cash, of which half could be returned to Trans Tasman Properties and 55 per cent of this could go back to Sea Holdings in Hong Kong.

Sea is struggling and a capital return from AGP through Trans Tasman would give it a big boost.

Sea reported a net loss of HK$200.8 million ($42 million) for the last December year and did not pay a dividend. This was its second loss in five years and shareholders' funds as a percentage of total assets have fallen from 48.8 per cent to 34 per cent over the period.

Its share price slumped to just HK$0.81 10 months ago, but has picked up since the announcement of AGP's asset sales.

Sea Holdings has the lowest sharemarket capitalisation of the three companies and AGP has the highest.

It is most unusual for a company at the top of an organisational chain to have the lowest capitalisation.

Although Hong Kong investors will be disappointed if AGP does not have a capital repayment, the group is still signalling that this is only a possibility.

Sea told the Hong Kong Stock Exchange that the AGP board was considering its options but "its current view is and remains that AGP should be a listed Australian entity pursuing its stated strategy since listing, which is to create shareholder wealth through active management of property investments and through undertaking development opportunities where value can be added".

Several shareholders, including GPG, are putting strong pressure on AGP and Trans Tasman to have capital repayments.

Christchurch businessman John Powell has formed an organisation called Trans Tasman Minority Shareholders Association (www.nzse50.com), which claims to represent approximately 8 per cent of Trans Tasman shares and have the support of a further 15 per cent.

The association is promoting the liquidation of Trans Tasman Properties and is arguing that this is in the best interest of all shareholders.

The next few weeks will give a clear signal whether the Sea/Trans Tasman/AGP group is willing to respond to the wishes of minority shareholders.

Newmarket Properties Trust

St Laurence Property's attempt to squeeze an extra few cents out of its Newmarket Property Trust shareholding has failed.

National Property Trust has stood firm and St Laurence has accepted almost the exact terms as last year's takeover offer.

Last year National Property Trust made a takeover bid for Newmarket Property Trust on the basis of six National units for every 10 Newmarket units.

Grant Samuel valued the offer at 55.2c per Newmarket Property Trust unit, compared with its estimated fair value of between 52c and 57c per unit.

But St Laurence took umbrage at the offer and raised its shareholding from 6.68 per cent to 10.03 per cent.

This meant that National could not obtain 90 per cent and move to compulsory acquisition.

Newmarket was delisted in December with National owning 87.2 per cent.

On June 11 National Property Trust announced that it had acquired St Laurence's shareholding on the basis of 6.468 National units for every 10 Newmarket Property Trust units. First NZ Capital placed the 4.4 million National units issued to St Laurence with institutional investors.

As Newmarket has not paid any dividend for the 2003 year, and the units issued to St Laurence are not entitled to any National dividends, the net effect is that St Laurence will receive almost exactly the equivalent of last year's takeover offer.

National will now compulsorily acquire the remaining Newmarket units and holders should receive the same deal as St Laurence.

This is subject to independent confirmation by Grant Samuel.

* Disclosure of interest: Brian Gaynor is a Trans Tasman Properties shareholder.

* Email Brian Gaynor