© Forsyth Barr Limited 2020 SPECIAL REPORT a Sleepy causes Joe prices candiverge from underlying value. to of home,thecase Meridian andContact presents another way stock hedge causing funds, wild swingsinsomecompanies’ share prices. Closer captured globalheadlinesof how abandof Redditors took on shortseller Over recent weeks theGameStop saga(see New Zealand electricity companies, Meridian Energy andContact Energy. The lasttwo months have beena wild ridefor the share prices of two focus | Monday 15February 2021 power surge last week’s Focus article
) SPECIAL REPORT | Monday 15 February 2021
…President Joe Biden being able to implement his green infrastructure plan compelled some to pile into clean energy investments.…
After winning the Presidency and the House of underlying shares in the same proportion as they Representatives in November, the Democrats, in are represented in the index. There are no fund the final act of a drawn-out United States election, managers or analysts deciding where to invest. secured a “Blue Wave” in January with unexpected As more money flows in, the ETF manager needs victories in both Georgia Senate runoffs (Vice- to purchase more shares, regardless of the price. President Kamala Harris represents the deciding These funds are “open-ended” – which means vote in the 50-50 split 100 seat house). there isn’t really a limit to how large they can The improved prospect of President Joe Biden grow. In contrast, in actively-managed ETFs being able to implement his green infrastructure (or other active investment funds) portfolio plan compelled some to pile into clean energy managers decide what the fund buys and sells. investments. What most probably did not Globally, ETFs and passive investing has become realise was that when purchasing two popular increasingly popular. They offer smaller investors, clean energy exchange traded funds (ETFs), typically a lower cost way of buying a diversified around 8% of their money was buying shares in basket of securities, including across an entire two New Zealand utilities. market, or a selection from a specific industry or theme. What is a passive ETF? Exchange traded funds (ETFs) allow investors to Why Joe Biden’s victory fuelled a rally in buy a bundle of securities (such as shares, bonds, New Zealand electricity companies or commodities). They trade on an exchange (like Securing a Blue Wave should better enable shares). An ETF can own hundreds or thousands President Joe Biden and the Democrats to of securities across different countries and advance their policy agenda. Many investors industries, or it can be focused on one specific concluded Biden’s policy to tackle climate change country or industry. and create jobs through investment in a “clean Passive share ETFs track an underlying index. There energy economy” would benefit clean energy are thousands of options. Some of the largest ETFs companies. Investment flooded into the sector. track country indices such as the United States One channel for this investment were two ETFs S&P500 or the New Zealand NZX50. Others are that track the S&P Global Clean Energy Index. industry-specific, for example, following technology, This index contains 30 companies from around healthcare, or financials indices. the world which are involved in clean energy- When an investor purchases a unit in these related businesses, including New Zealand’s passive ETFs, the manager then purchases the Meridian Energy and Contact Energy. Together, Page 2 …Meridian and Contact’s share prices jumped +27% and +21% in a week…
the two companies comprise around 8% of the CONTACT ENERGY AND MERIDIAN index – a large amount for two New Zealand ENERGY: SHARE PRICES SURGING shares in a global ETF. AND FALLING WITH ETF FLOWS
As investment money flowed in, the ETF 2 a e g managers were forced to purchase Meridian e a e g and Contact shares in large volumes. Because of Meridian and Contact’s relatively small size c e i r P and particularly their low liquidity (how many e r shares typically trade on the market), short-term S h a 4 demand substantially exceeded supply. Meridian and Contact’s share prices jumped +27% and 2
+21% in a week. Share prices then quickly gave 2 2 2 2 2 2 2 2 2 2 2 2 2 g a a e a e e e up these gains as ETF demand faded.
SURGE IN DEMAND FOR CLEAN ENERGY Source: Thomson Reuters, Forsyth Barr analysis
INVESTMENTS: FUND FLOWS INTO THE
ISHARES GLOBAL CLEAN ENERGY ETF Oops! That didn’t work so well … let’s try something different Obviously buying an investment at a high price