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Opinion: Shares boom as investors shake off gloom

By Kate Perry of NZPA

Friday 7th April 2006

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The brakes are on the economy, but equity investors have put the pedal to the metal, revving the sharemarket to record highs.

The economy unexpectedly slipped into reverse in the December quarter, with gross domestic product (GDP) falling 0.1%.

Other gloomy economic indicators included the ever-ballooning current account deficit and a widening trade deficit.

But sharemarket investors seem confident that while the economy may be puttering along in the slow lane, recession will not be at the end of the road.

The benchmark NZX-50 gross index is in the middle of a record-breaking streak, recording its biggest rise in a single month since 1998 - gaining 297 points, or 8%, over the period.

Both the value and volume of shares traded during March were up, with the average daily value of trades rising 45% on last year to a record $172 million.

The number of average daily trades also jumped, hitting 2704, up from 2315 in February.

The market strung together a six-day streak when more than 3000 trades took place, which NZX said was the first run of its kind since September 2001.

The upbeat sharemarket activity coincided with a small bounce in business confidence.

A net 51% of businesses responding to the National Bank business confidence survey expected business conditions to deteriorate over the next year, a more positive outlook than a net 65% last month.

Firms' expectations for their own outlook also brightened slightly, with a net 5.2% of respondents expecting their own activity to increase over the next year, against 4.4% expecting a downturn in February.

Sharemarket activity was spurred by a slump in the New Zealand dollar, combined with merger and acquisition (M&A) activity.

The New Zealand dollar recently slumped to 22-month lows of under US60c against the US dollar and two-year lows against the Australian dollar, spurring interest in export-related stocks, and companies that have major assets offshore.

Increased M&A activity has also excited investor interest and freed up some cash.

The market's top four stocks have all been the centre of M&A activity or speculation in recent weeks.

That has seen former No 3 stock Carter Holt Harvey delisted after Graeme Hart's Rank Group completed its $3.3 billion takeover.

Mild panic ensued when Carter Holt's departure was followed up with rumours that Fletcher Building was looking to shift its head office across the ditch and list on the Australian bourse.

Fletcher Building chief executive Ralph Waters confirmed to NZPA that the company had looked at what was involved in listing on the Australian stock exchange, but had no plans to make the move in the near future.

"Our exercise was really more about understanding all of the hoops we would have to go through if we were to consider a listing, along with trying to assess whether there would be a material benefit in doing so, but not to make a decision on it, just to get some understanding of the facts," he said.

Fletcher Building has been something of a market darling recently, and one of the key drivers behind the top 50's recent bull run - rising to around $9.30 from about $7.45 in February.

While talk of Fletcher Building leaving the local bourse created a stir, the market took less notice of talk of a possible Telecom takeover.

Australian-based Credit Suisse analysts Justin Cameron and Mark Storey said Telecom was a logical candidate for a leveraged buyout at its current share price.

"With strong cashflow and a balance sheet underleveraged, we view the potential of a leveraged buyout of Telecom as increasingly likely," the pair said in a report.

But local analysts and brokers dismissed this as unlikely - pointing out that crown approval must be sought for any interest in the company over 10%, and no foreign shareholder can own over 49.9%.

Fellow blue-chip stock Contact Energy is also at the centre of M&A activity, with a proposal on the table to "merge" with its Australian majority owner, Origin Energy.

Under the deal, which has been criticised as a takeover in disguise, Origin would move to a 75.7% stake of the merged company, while Contact shareholders, who currently own 49% of the local power company, would hold just 24.3% of the merged group. Contact would also maintain its listing on the New Zealand stock exchange.

Another merger/takeover which excited market interest recently is a proposal for Australia's Transpacific Industries to "merge" with Waste Management.

Waste Management shareholders would receive $8.64 per share in cash, but no equity in the merged unit, meaning the deal was effectively a takeover.

Since the proposal was announced, Waste Management's share price surged. It was the top 50 index's biggest gainer in March, rising 32%.

Lyttelton Port Company (LPC) is also a takeover target, after Christchurch City Council's holding company Christchurch City Holding Ltd (CCHL) set its sights on controlling the port.

Originally CCHL wanted to gain a 100% stake in LPC, then on-sell a 49% holding to Hong Kong's Hutchison Port Holdings, which would operate the port.

But that was thwarted when Port Otago grabbed a 10.1% blocking stake in LPC, and Hutchison subsequently pulled out of the bid.

New Zealand Exchange chief executive Mark Weldon told breakfast television this week that capital markets were designed to cope with M&A and companies coming and going

But he said of bigger concern than companies leaving the stock exchange was the loss of jobs, talent and leadership that occurred when companies moved offshore.

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