Opinion: Share investors undeterred by R-word

By Simon Louisson of NZPA

Friday 8th July 2005

Westpac Bank raised the R-word this week but that didn't deter investors who pushed the sharemarket benchmark index to new heights.

Talk of the possibility of recession by Westpac chief economist Brendan O'Donovan was contradicted by the authoritative OECD which produced a contrasting rosy report on New Zealand's prospects.

The OECD said our economy had "continued on its strong upward course" and was on track towards the Government's objective of returning to the top half of the club of rich nations.

While a period of slower growth was widely expected, "the country's prospects are bright, with potential growth projected to remain comfortably above 3% per year over the medium term".

Its view was backed by local independent forecaster, Infometrics, which also expects 3% average growth over each of the next five years. Managing director Andrew Gawith predicted the bottom of this economic cycle would be 2.5%. In past cycles, that was close to the peak.

Gawith noted that because population growth had slowed due to lower immigration, per capita economic growth was still relatively robust even with the slowdown of GDP growth.

He also made the point that there had been a favourable shift in New Zealand's terms of trade. Productivity had increased mainly due to farmers moving production into higher value products to improve returns. Kiwifruit farmers, for example, had switched to from green to gold fruit.

"It means New Zealanders on average have more spending power."

Certainly, O'Donovan's gloom-saying failed to get through to share investors who have sent the NZSX-50 index up a phenomenal 13% in just two months.

"All the signals are there but this market has continued to go up, so it has defied what you would normally expect when the economy is starting to slow down," commented Goldman Sachs JBWere broker Murray Rutherford.

Investors are determined to cash in on merger and acquisition (M&A) activity. Last week, it affected shares in Carter Holt Harvey, NGC-Vector, Feltex and The Warehouse.

Even bombs in London failed to jolt the market.

This week, Wrightson and Pyne Gould Guinness shares rocketed ahead on a merger proposal and casino operator Sky City came into play.

The friendly PGG-Wrightson deal, stitched together by Wrightson principal Craig Norgate, is another rationalisation of the farm services sector that saw Wrightson swallow Williams & Kettle earlier this year.

Putting together two of New Zealand's most venerable companies, with PGG's strength in the South Island and Wrightson in the north, makes sense.

The spin from Norgate et al was that, although the merged entity would generate $1.1 billion in revenue, that would only be around 15% of the $7 billion market. That has yet to be tested by competition watchdog, the Commerce Commission.

Farmers said "yeah, right" to the 15% claim.

Keith Kelly, Federated Farmers' Auckland president, could not understand how they reached this conclusion.

"PGG are huge, as are Wrightson, so I don't know how they get 15% out of it."

The end play of that game may have longer to run when the Commerce Commission runs its ruler over the deal.

The Sky City game may be just beginning.

Shares in Sky initially rose on reports of rich prices being paid for the 105 million shares being floated in Australian lottery and pokies company Tattersall's.

Then Sky shares jumped again on news that Australian company Unitab was buying Sky shares. The Australian newspaper reported the gambling company had bought 2% of Sky. In fact, it was 2 million shares (0.5%) and Unitab hosed down speculation it was building a stake.

"I think people got a bit hot and sweaty about it," Unitab general counsel and strategist Robbie Cook said.

"It's purely an investment on our part. We've got no current intention of purchasing any more shares. The shares are held in our name. If we were doing any sort of corporate activity we would not have them held openly on the register," Cook said.

He said while Unitab had for a long time been interested in opportunities "to add some value" in the gaming sector, "that's not what the holding in Sky is about".

Analysts partially agree with Cook, saying it would be peculiar for a predator to reveal a stake until it was forced to, or reached the 5% disclosure threshold.

On the other hand, they said rationalisation in the Australasian gaming sector was as inevitable as it has proved in the local rural services sector.

ABN Amro head of research James Millar said Sky investors would be swayed by two diametrically opposed themes.

"There is the macro view of consolidation in the gaming sector that has been unrelenting and will keep being unrelenting until there are only one or two players in Australasia.

"Then, you have the other side of the story. Sky's earnings have been affected by various external factors - such as the smoking ban and various regulatory pressures - and that makes them less attractive."

"They are the two forces and, at the end of the day, everyone has to make up their mind."

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