Passive funds sell millions of Contact and Meridian shares

New Zealand's main share index fell as more stocks were added to a clean energy index prompting offshore passive funds to sell millions of shares in Contact and Meridian.

Friday, October 15th 2021, 7:02PM

by BusinessDesk

The S&P/NZX 50 Index fell 36 points, or 0.3%, to 13,012.19. Turnover was $227 million in an extended trading session.

Renewable electricity generators were responsible for the underperformance, falling as funds tracking the S&P Clean Energy Index rebalanced their portfolios.

The passive fund was responsible for pushing Contact and Meridian to massively stretched valuations last summer as a surge of demand for clean energy stocks was channelled into the two relatively illiquid stocks.

In April, the index builder changed the design of the portfolio to include many more stocks, sending the two NZ companies crashing back towards fundamental value.

Today, they both fell again as a further 19 stocks were added to the index causing Meridian and Contact to be down-weighted.

One estimate seen by BusinessDesk suggested passive funds would have to sell 3 million Contact shares and 4.8m Meridian shares.

Contact Energy shares declined 1.7% to $8.07 and Meridian Energy shares dropped 1.3% to $4.83, on volumes of 4.4m and 7.7m shares traded.

Meanwhile, listed electricity companies not included in the index made small gains today.

A rally that has seen A2 Milk’s stock price soar more than 15% took a pause today, the infant formula exporter declined 1.9% to $7.08 and its supplier, Synlait Milk, fell 3.8% to $3.77.

Another recent strong performer, Mainfreight dropped 2.3% to $87.25 today.

Equity research from Forsyth Barr warned that log exports through NZ’s ports will peak by 2026 and then decline as less planting activity in the past few decades leads to smaller harvests.

This poses a particular risk to Napier Port, which declined 0.9% to $3.18 today, as forestry accounts for more than 40% of its revenue.

Forsyth Barr lowered its target price from $3.05 to $2.90 on lower “long term log export assumptions as Hawkes Bay harvesting activity slows”.

South Port climbed 0.4% to $9.20 and Port of Tauranga climbed 1.9% to $6.90, as it will be less badly affected by falling log volumes.

The analysts said forestry likely makes up just 12% of revenue and has greater exposure to larger forestry players and a more favourable planting profile

“Port of Tauranga is a premium infrastructure stock given its consistent earnings and favourable long term growth profile, yet remains expensive in both absolute and relative terms, in our opinion,” they said.

The NZ dollar outperformed its rivals, trading at 70.36 US cents at 3pm in Wellington up from 69.76 cents yesterday.

All three main drivers of the currency were pushing it higher overnight: agricultural commodities and oil prices climbed, investor risk appetite bounced from a recent slump, and NZ bond yields continued to climb.

Tags: Market Close