Dollars & Sense: Don't expect Fonterra shares to fly off shelf

Will investors buy into state assets and Fonterra? The answer may surprise you, says Bank of New Zealand chief economist Tony Alexander. 

Legislation has been passed allowing the government to partially sell-off some state assets, and Fonterra shareholders have voted in favour of selling off rights to some of their earnings to non-suppliers of milk. Are we likely to see investors hungry for these new assets?

In the case of the state assets, the answer is “Yes” for a variety of reasons. First, we all complain about rising electricity prices, so will probably see the link between owning shares in an electricity company and getting some offset to rising costs.

Second, barring some wonderful technological development, we are going to be dependent upon the large electricity generating companies for a long, long, time. Home solar and wind power systems simply don’t cut the mustard when it comes to low-cost, hassle-free, and non-intrusive energy supply. Therefore, demand for electricity from the state companies is likely to be strong for a long time.

Third, 2012 has a very interesting relationship with 1992. Back then inflation dropped sharply, interest rates for bank depositors halved, and those older depositors went looking for higher yielding assets in order to get the returns they had budgeted on for their retirement. What many did was invest in finance companies which later collapsed, or residential property management companies which also collapsed.

People paid too little attention to the risk-reward trade-off and invested in things they did not understand, simply because the advertisements looked good or a belief that the old fella running the show could surely do no wrong.

Just these past few weeks, with the Greek crisis flaring again and interest rates once more falling, plenty of us forecasters have been out and about talking in terms of New Zealand interest rates remaining at low levels for potentially a great number of years. This talk has grabbed the interest of those in retirement or approaching it who now see that they are not going to get the easy income they had been budgeting on.

History tells us what these people will do. They will go searching for yield. History also tells us that they will believe that this time things will be different, that lessons have been learnt, and the same mistakes won’t be repeated. But they will. We will within three years see this cohort of yield seekers once again actively chasing any old financial offering fronted by a friendly well known face, throwing their money at them.

But before that happens, people are going to seek out things they consider more sturdy than the financing of second hand cars in South Auckland and apartments of minor size in an over-supplied inner city. People will look for good yielding corporate bonds (some of these fail though), and they are likely to show strong interest in owning a part of the electricity infrastructure of the country. The chances are that there will be good domestic demand for the state assets.

What about an investment in Fonterra’s value-added dividend stream? Will people chase that in the same way? Probably not. While Fonterra suppliers voted in favour of TAF it is clear that outside investors will be looked upon with suspicion. Being merely tolerated as an investor is probably not the sort of thing which meets the demand of aged investors who want to sleep easy at night.

Having said that, some slick advertising using Murray the Cow could bring the punters in. I shall be watching the citizen level of demand for Fonterra shares with interest – but with lower expectation of high demand than for the state assets.