Market News 27 July 2026

Johnny Lee writes:

Last week’s inflation data has strengthened the calls for a rate hike at the next RBNZ meeting on September 1, as inflation reached an annual rate of 4.1%. This is the highest annual rate of change since December 2023.

This is now well outside the 1% to 3% mandate of the Reserve Bank. Economists had broadly expected this result, affirming forward expectations rather than changing them.

While this data was expected, it is important to note that it reflects the annual rate up to June. This June quarter saw a significant increase in the price of oil. The end of June saw this decline markedly, before immediately returning to elevated levels following the re-escalation of hostilities.

Outside of the cost of petrol and petrol by-products, electricity and council rates remain a core driver of inflation. This was partially offset by a decline in the price of fruit, and a significant decline in the cost of domestic accommodation services.

For now, the question will be how many hikes are seen in the last three meetings of the year (September, October, December). Two hikes remain the base assumption, but the likelihood of a third is rising and a sustained, elevated oil price may lift it further.

Mercury Energy, one of the big four of New Zealand electricity generators, has announced it has purchased a 12.7% equity stake in data centre developer Datagrid Holding Group. The purchase price of $30 million USD implies a valuation of around $420 million NZD.

The Datagrid Data Centre project, described as an “AI factory”, is expected to be operational in 2028. It will become one of our largest electricity uses in the country, equivalent to around 6% of our national demand.

Alongside this, Datagrid Is developing a subsea cable system connecting Invercargill to Sydney and Melbourne.

This is not the first tie up between Mercury and Datagrid. Mercury signed a 140MW Power Purchase Agreement with Datagrid in March, as part of its plan to derisk its development pipeline.

These PPA’s are an increasingly important part of our electricity infrastructure, designed to provide users (Datagrid) with a guaranteed supply of electricity and confidence around costs, while giving suppliers (Mercury) known demand to “build into”. 

The 12.7% stake gives Mercury shareholders, which of course includes the Crown, a direct exposure to the project and the underlying AI industry. Detractors of the project, particularly those concerned about the lack of public ownership or the additional strain on the electricity supply, will be pleased with these developments.

Overall, it is an interesting development for Mercury shareholders. Mercury has historically been in the business of generating and retailing electricity, and this move towards data center and fibre optic cabling ownership is a step towards owning “the other side” of the demand and supply equation. 

Holders of the Precinct Convertible Notes, PCTHB, should take the time to refamiliarise themselves with the product, as we approach the conversion date of 21 September.

These notes were three-year securities issued in 2023. In September, the 65 million notes will likely convert into shares. While Precinct does retain the right to repay these in cash, this was not what occurred with the previous series, PCTHA. In the event that it repeats this course of action, investors will need a plan for these notes.

If converted into shares, this is done at a price equal to the volume weighted average price of the share in the 20 business days prior to the conversion announcement date. For the sake of simplicity, if the average price lands at $1.10, the 65 million shares will convert into approximately 59.1 million shares.

The Conversion Price Cap of $1.40, which was designed to offer potential upside for noteholders, was since reduced to $1.3449 following a capital raise late last year. Ultimately, the current price is nowhere near these levels and will almost certainly not be a relevant factor upon conversion.

Assuming the notes are converted into new shares, noteholders should now be considering their options. There are three scenarios that could be considered.

For those content to hold Precinct shares long-term, the simple solution is to wait until September and become a shareholder in the company.

For those seeking a return of their capital, the two remaining options become relevant.

The first and most obvious is to attempt to sell the notes prior to conversion. This provides a guarantee of value but requires a buyer to emerge. At present, there are no buyers. More on this later.

The reason noteholders may consider an early sale is to shield themselves from the possibility of the share price deteriorating rapidly upon conversion. This is exactly what occurred in 2021, when the previous iteration of convertible notes reached their conversion date.

It is important to note that these were converted at their cap, meaning that the early sellers were capturing a profit. This will not be the case in September, barring a miraculous recovery in the share price.

The second option is to await conversion into shares, then attempt to sell the shares. The shares are far more liquid than the notes, but this does expose the noteholder to the possibility of an uncertain capital loss (or gain).

Logically, the conversion will lead to an influx of selling. PCTHB is a hybrid instrument, and many holders simply want to collect interest and receive their principal back upon conversion. With 60-odd million new shares created, some of these will seek a quick exit to recoup this principal.

The aforementioned lack of buyers in PCTHB makes for an interesting proposition too. 

In theory, a buyer of PCTHB at a discounted price, where the market currently trades, buys a single interest payment and a discounted Precinct share. As we near the conversion date and gain greater clarity with regards to Precinct’s preference for a share or cash conversion, we will likely see buyers of Precinct shares pivot to the convertible note, and liquidity emerge, as the note becomes a more straightforward arbitrage between the two instruments.

Holders of the PCTHC, the third iteration of convertible notes maturing next year on the same day in September 2027, should also be watching this process carefully, as a similar decision will be required at the time. 

Noteholders of PCTHB are facing a decision over the coming two months. Those noteholders that are comfortable remaining a shareholder in Precinct long-term do not need to act. However, those expecting a return of their principal will need to consider their options, as a sale of either the Precinct shares (after the 21st) or the Precinct notes (prior to mid-September when trading ends) will be necessary.

Travel

Edward Lee - Auckland (Ellerslie) - 6 August

David Colman - Whanganui - 6 August

David Colman - New Plymouth - 7 August

Edward Lee and Gavin Parkes – Wellington – 10 August

Johnny Lee – Taupo – 1 September

Johnny Lee – Hamilton – 2 September

Johnny Lee – Tauranga – 3 September

Johnny Lee – Christchurch – 7 September