Opinion & Analysis
OPINION: Who is to blame when promising investments turn sour?
The Government seems to be bearing most of the responsibility for a string of sharemarket problems that have hit companies like Chorus, Mighty River and Meridian. This perception appears to be shared by major overseas funds that have been dumping these stocks: with at least one opting to quit other New Zealand investments.
Is this fair?
I meet regularly with fellow grey-hairs and advisers to discuss share and bond portfolios held by investment funds that over the years have done reasonably good jobs raising money for charitable purposes.
At one meeting last week much time was spent discussing Chorus which in the short term looks a dead duck. Typically these funds are conservative, and spread their risk, having a reasonably large range of investments in sound companies that offer good dividends. Rather than the Government getting all the blame for Chorus' problems, the strongest criticism was directed at the Commerce Commission - in particular that its controversial valuation of the copper network was possibly flawed.
Everyone at that meeting wondered why anyone would invest in any New Zealand company that is subject to such unpredictable regulatory scrutiny: including electricity and telecommunications. Shares in many of these sectors have fallen sharply this year. Last week there were rumours that the regulators were about to hit the port sector hard.
The perception is that Kiwi regulators want to foster competition and keep prices down for consumers. They are subject to intense self-interested lobbying from rival companies and industry groups seeking the best financial outcomes for themselves. Everyone at the meeting agreed that it seemed that the regulators seemed to pay little regard for thousands of people who invest in New Zealand companies: and who have lost money as a consequence.
However the Government certainly got the blame for the Chorus problems in a leading article in a widely read international newsletter FE Trustnet last Thursday. This wouldn't have done New Zealand investment any good. Jason Pidcock, investment manager of the Newton Asian Income said the "completely unexpected U-turn by the New Zealand Government was responsible for a 6.4 per cent hit taken by the [PndStlg]4.4 billion (NZ$8.8b) fund's share price in November."
He said the Government failed completely when it reneged on an agreement with Chorus following pressure from the regulator.
"When we think of New Zealand we probably associate it with rugby, lamb or dairy products, or perhaps Brendan Cole from Strictly Come Dancing. For me, though, I now associate New Zealand with political risk."
He wrote that what had happened to Chorus was akin to a government unexpectedly reducing the coupon on a government bond. He blamed the Chorus problems for other knocks on New Zealand shares in its portfolio including Meridian, Mighty River, Telecom and Z Energy.
As a result, the fund was cutting its exposure to New Zealand investments and it did not expect to reinvest here at any time in the near future. "This is a shame because New Zealand ought to be a developed and stable country. Many stocks there are yielding quite a lot," he said.
His article drew a number of comments. The most critical came from New Zealand resident Ian Rogerson who said "any informed investor should have foreseen the possibility that the regulator, who is independent of the Government, might recommend a significant reduction in the pricing of the copper network."
Rogerson said the fund manager should have been aware of Chorus' debt levels and how vulnerable its high dividend would be if things turned against it. "His error is no reason for bad- mouthing New Zealand as an investment destination," Rogerson wrote.
Rogerson's comments are reasonable: the massive prospectuses put out by Chorus, Mighty River and Meridian all dwelt on the pros and cons of the investments, including potential market problems, falling energy demand and regulatory risks.
The last minute intervention by Labour and the Greens in promising to further regulate the energy sector is the main reason for the severe falls in the energy stocks. At this stage these shares still offer good dividend returns, which investors will continue to enjoy: but the share prices will stay under pressure till the political risks are removed.
There is also no shortage of electricity, and a question over the long term future of the Bluff smelter. One solution might be to invest heavily in the cloud related technology: cloud centres are enormous consumers of electricity. Think of all those well paid geeks living in Bluff or Wellington handling information for Xero or Kim Dot Com.
Many people, however, did invest in Chorus, knowing the risks but expecting that the early supportive comments from the Government meant that it had its full financial backing. In its early days Chorus got considerable support from analysts and its share price soared. You have to be sorry for anyone who bought at over $3 in August.
Most investors in Chorus, I gather, are braced for more bad news, but unwilling to sell at current prices while no one, it seems, can guess what will happen next. There is talk that Chorus might try to raise as much as $400m in a cash issue: a tall order for a company that is not expected to resume paying dividends soon.
- © Fairfax NZ News