BROKER COMMENT Positive signs from abroad

Press, 22 July 1989, Page 28

BROKER COMMENT Positive signs from abroad

By

Michael J. M. Sidey,

director, Forsyth Barr

Strong international equity markets, the continuing downtrend in Government stock yields and a prediction from one of America’s largest merchant banking operators that the Australian dollar could possibly fall 20 per cent against the U.S. dollar were the highlights of this week.

The Dow Jones responded extremely positively to better than expected inflation figures for May. This was supported later in the week when the Federal Reserve bank’s chairman, Mr Alan Greenspan, hinted that interest rates may ease further (the aim being to bring about a soft landing) and therefore avoiding a recession. The U.S. dollar has remained relatively steady to firm in spite of lower yields and a bearish trade deficit figure. This $lO billion-plus deficit for May was a direct result of the strong U.S. dollar making imports cheaper and exports less competitive. The FTSE 100 in Britain also had a good week on the back of the firm U.S. market and takeover activity. In Australia, an economy which is due for a good dose of Rogernomics, the weaker currency caused equities to rise, especially in resource related stocks. It is recognised that, on an historical PE basis, stocks in

Australia look underpriced and therefore a weaker dollar makes entry attractive. It has been a leader-based rise with, very little breadth and should be watched closely. j It apppears the Australian Reserve Bank is acting to stop too much volatility in the Australian dollar and keep the lid on bearish interest rates.

This has the effect of creating perceived stability. Next Thursday’s CPI figures will give notice of just how much intervention will be required. Interest returned to the local bond market on Thursday with one major buyer responsible for nearly 80 per cent of the Government Stock Contract futures volume traded. The activity also followed through to the physical market.

Buying came from several quarters including major offshore interest, which was, apparently sparked by a New York broker’s recommendation to buy long New Zealand bonds. This additional demand when the local market was short of bonds has forced yields lower. This is further confirmation of the downward trend in New Zealand Government Stock yields and will be positive news for the Reserve Bank and Government as they go into Budget week.

There was also evidence that

funds were moving, from Australia into bonds after the Citicorp currency announcement about a potentially weak Australian dollar.

The spate of company collapses following the 1987 sharemarket crash has focused attention on the plight of the small shareholder. They were disadvantaged by inadequate disclosure laws and often were the thin end of the wedge when it came to negotiability at the right price in take-over situations.

Now, not only have rules changed but the small shareholder may have found an ally in the institutional investor. In most instances, institutions are minority shareholders also, but often their financial clout enables them to own a strategic holding. Ten per cent is often enough because it allows that shareholder to block the compulsory acquisition of a company by a major shareholder or predator. This of course deprives the buyer access to a company’s cash flow and earnings. In recent times a number of situations have existed in the market where institutional investors have increased their holding in a company under takeover, to thwart the desires of an aspiring predator.

On Thursday, the AMP Society announced it had increased its holding in Lane Walker Rudkin to 10.8 per cent having bought on

market 1c above Brierley Investments’ offer price of 175 c per share. Given that the independent valuation of Lane Walker Rudkin, Ltd, is LB2c per share, it is possible AMP may try to extract a higher bid from Brierley’s. This would benefit other minority shareholders. AMP has been active in Australia also. The well publicised attempted sale of lEL by Brierley to Goodman Fielder Wattie, Ltd, did not proceed because institutional and corporate shareholders did not believe it was in the best interests of Goodmans to proceed.

Similarly, John Spalvins’ Adelaide Steamship has lifted its shareholding in lEL above 10 per cent following the announcement of a management buyout by directors of that company (under Australian rules shareholders with a vested interest in the MBO are unable to vote). Therefore for the management buy-out to be successful, Spalvins will need to vote his shares in favour. This is unlikely so the possibility exists that an offer may be made for all the. shares on similar terms to the sAust2.4o being paid to Brierley Investments, Ltd, and Goodman Fielder Wattie, Ltd. Again, this result would be to the benefit of small shareholders.

It is encouraging to see institutions taking an active role in company developments.