Yovich & Co. Weekly Update - 24 June 2013

Jun 24, 2013 | Commentary

This Week's Themes

• The really big news last week was the announcement by the U.S. Federal Reserve Chairman, Ben Bernanke, explaining how he is going to slow the bond buying process. In essence, he signalled that as economic conditions continue to improve, it makes sense to reduce the buying program towards the end of 2013. This has prompted equity markets to tumble as the carry trade of borrowing at record low rates and buying equities is unwound. I believe that we are going to go through a period of higher volatility as the markets react to lower stimulus. However, overall this is good news as a strong U.S economy is essential for global growth.

• The correction in New Zealand equities has set in after a rally of 38.6% over the last year. The NZ market has now fallen 6.7% since the high in mid May. Growth numbers out last week were also weaker than expected, showing that the draught at the start of the year had a bigger impact than anticipated.

• The USD rally gathered momentum after Ben Bernanke's announcement as the currency carry trade unwinds.

Investment News

Mighty River Power (MRP.nz): Initial Research Coverage

Since the listing 6 weeks ago, the share price for MRP has slowly faded downwards after a strong first day where the share price reached $2.73. Weakening market conditions, soft international demand since listing and regulatory risk have all weighed on the stock since that exciting first day, resulting in a current price of $2.25. First NZ Capital has initiated research coverage for Mighty River Power and highlights the regulatory risk as a significant reason to discount their target price of $2.82, based on rolling forward their spot valuation. They do however note that the improvement in the polls from National is favourable to MRP. Other possible catalysts for a reversal in sentiment include clarity surrounding some of the other risks such as the operations in Chile and the operational cost issues surrounding the Tiwai Smelter. After discounting for these risks, First NZ Capital initiate coverage with a Neutral rating and $2.53 price target and note that the dividend yield at these levels should provide support.

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Jarrod Goodall

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