New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Electricity Sector<br>ETFs&nbsp;Trumped Fundamentals, Temporarily</h2>
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<p>We expect the wild Exchange Traded Fund (ETF) flow driven stock price movements for Contact Energy (CEN) and Meridian Energy (MEL) to come to an end, although there could be further downside in the short-term. The S&amp;P Global Clean Energy (GCE) Index is undertaking a review, the result of which we expect will be a material&nbsp;downweight&nbsp;for CEN and MEL. That means the two&nbsp;iShares&nbsp;GCE&nbsp;ETFs&nbsp;that follow the GCE Index will be material sellers of CEN and MEL in April 2021, with ~57m+ (8.0%+ of free float) CEN shares and 79m+ (6.3% of free float) MEL shares needing to be sold. We expect normal valuation metrics to reassert themselves following the expected GCE Index change. Our preferred stock in the sector is Genesis Energy (GNE) and it has been unaffected by the ETF gyrations. We continue to view MEL and Mercury (MCY) as expensive, especially in light of rising interest rates.</p>
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<h3>S&amp;P Global Clean Energy Index flavour of the moment</h3>
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<p>Fund flows into the two iShares Global Clean Energy (GCE) ETFs that track the S&amp;P GCE Index have surged in recent months, creating pricing anamolies such that S&amp;P is undertaking a review of the GCE Index rules that is likely to result in a material downweight for MEL and CEN. MEL and CEN stock prices have seen extreme volatility as a result. Since late November 2020, both CEN and MEL's share prices have risen and then fallen ~NZ$3.00 from NZ$7.64 and NZ$6.40 respectively.</p>
<p>We estimate that the S&amp;P review will result in the iShares GCE ETFs having to sell 57m+ CEN shares and 79m+ MEL shares. That is the equivalent of ~57x and ~49x of average daily trading volume (or 8.0% and 6.3% of free float shares respectively). The key change is to cap each constituents weight in the GCE Index to a multiple (3x/4x/or 5x) of their liquidity weight. With some large liquid stocks in the GCE Index, CEN and MEL are relative minnows, hence, their weighting in the GCE Index will fall materially. It is unclear when S&amp;P will confirm changes to the GCE Index rules. That said, the reference date for setting the GCE Index weightings is Friday, 19 March, with the weighting changes to take effect after close on Friday, 16 April 2021.</p>
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<h3>MSCI NZ Index does not appear to be the reason for MEL and MCY trading at premium to CEN and GNE</h3>
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<p>In recent years (since mid-2019) MEL and Mercury (MCY) have traded at ever increasing premiums to CEN and Genesis Energy (GNE). The inclusion of MEL and MCY in MSCI NZ Index has often been cited as a key reason for the difference. However, our analysis suggests that is not a key reason as ETFs that track the MSCI NZ Index have actually owned fewer MEL and MCY shares now than late 2019. We continue to view MEL and MCY as expensive relative to CEN and GNE.</p>
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<div><strong>Andrew Harvey-Green</strong></div>
<div><a href="mailto:andrew.harvey-green@forsythbarr.co.nz" target="_blank" rel="noopener">andrew.harvey-green@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 8185</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Electricity Sector ETFs&nbsp;Trumped Fundamentals, Temporarily


We expect the wild Exchange Traded Fund (ETF) flow driven stock price movements for Contact Energy (CEN) and Meridian Energy (MEL) to come to an end, although there could be further downside in the short-term. The S&amp;P Global Clean Energy (GCE) Index is undertaking a review, the result of which we expect will be a material&nbsp;downweight&nbsp;for CEN and MEL. That means the two&nbsp;iShares&nbsp;GCE&nbsp;ETFs&nbsp;that follow the GCE Index will be material sellers of CEN and MEL in April 2021, with ~57m+ (8.0%+ of free float) CEN shares and 79m+ (6.3% of free float) MEL shares needing to be sold. We expect normal valuation metrics to reassert themselves following the expected GCE Index change. Our preferred stock in the sector is Genesis Energy (GNE) and it has been unaffected by the ETF gyrations. We continue to view MEL and Mercury (MCY) as expensive, especially in light of rising interest rates.


S&amp;P Global Clean Energy Index flavour of the moment


Fund flows into the two iShares Global Clean Energy (GCE) ETFs that track the S&amp;P GCE Index have surged in recent months, creating pricing anamolies such that S&amp;P is undertaking a review of the GCE Index rules that is likely to result in a material downweight for MEL and CEN. MEL and CEN stock prices have seen extreme volatility as a result. Since late November 2020, both CEN and MEL's share prices have risen and then fallen ~NZ$3.00 from NZ$7.64 and NZ$6.40 respectively.
We estimate that the S&amp;P review will result in the iShares GCE ETFs having to sell 57m+ CEN shares and 79m+ MEL shares. That is the equivalent of ~57x and ~49x of average daily trading volume (or 8.0% and 6.3% of free float shares respectively). The key change is to cap each constituents weight in the GCE Index to a multiple (3x/4x/or 5x) of their liquidity weight. With some large liquid stocks in the GCE Index, CEN and MEL are relative minnows, hence, their weighting in the GCE Index will fall materially. It is unclear when S&amp;P will confirm changes to the GCE Index rules. That said, the reference date for setting the GCE Index weightings is Friday, 19 March, with the weighting changes to take effect after close on Friday, 16 April 2021.


MSCI NZ Index does not appear to be the reason for MEL and MCY trading at premium to CEN and GNE


In recent years (since mid-2019) MEL and Mercury (MCY) have traded at ever increasing premiums to CEN and Genesis Energy (GNE). The inclusion of MEL and MCY in MSCI NZ Index has often been cited as a key reason for the difference. However, our analysis suggests that is not a key reason as ETFs that track the MSCI NZ Index have actually owned fewer MEL and MCY shares now than late 2019. We continue to view MEL and MCY as expensive relative to CEN and GNE.



Andrew Harvey-Green
andrew.harvey-green@forsythbarr.co.nz
+64 4 495 8185





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Electricity Sector: ETFs Trumped Fundamentals, Temporarily