Sluggish market pins hopes on mergers

With company earnings likely to be bogged down for some time fund managers are hoping mergers and takeovers will drive share prices higher.

"It's a little hard to get excited about near-term prospects for share price performance," says First NZ Capital research manager Barry Lindsay. "But corporate activity can change things.

"There's always going to be the odd surprise corporate manoeuvre which is going to lead to a share price gain for the particular stock involved."

AMP Capital Investors head of equities Guy Elliffe is putting money on it.

"We continue to believe merger and acquisitions will continue to be a feature of the market," he said, especially for some mid-cap stocks that were cheaper on an enterprise value - or debt plus market capitalisation - to earnings basis.

He gives S8's takeover of travel company Gullivers as a recent example. "We continue to see opportunities of that nature."

He also sees "some pretty interesting M&A implications" around The Warehouse. "But it's gone from $3.50 to $5 so the valuation story isn't quite as supportive whereas there are one or two other smaller stocks that haven't really had very good moves but we think still represent pretty compelling value."

Tower Asset Management portfolio manager Paul Robertshawe said Gullivers was a "classic example" of a company whose cashflow was undervalued, with two possibilities: "Either the market recognises that those cashflows are worth more or someone else does," he said. "So we certainly look for stocks like that, but we don't care whether a corporate takes them out or whether the market just realises the cashflow is worth more."