Brian Gaynor: Why we're too weak to fight the hobbits

A booze barn for the Rugby World Cup and enticing Hollywood studios here to make movies like The Hobbit are not our most pressing needs. Photo / Supplied

This week's major developments, the Hobbits and the Australian/Singapore sharemarket deal, are further reminders that our political leaders are quick to respond to popular causes but are hopeless at developing a long-term economic strategy for the country.

Prime Minister John Key has saved The Hobbit by dropping an additional $20 million-plus into the pockets of Time-Warner, a corporate giant with a sharemarket value of US$36.4 billion or about 90 per cent of the total value of all domestic companies listed on the NZX.

But how does this fit into New Zealand's overall economic objectives? Have we become cargo cultists who are prepared to drop on our hands and knees when overseas corporates threaten to leave and take their glittering gifts with them?

The partial answer to this can be found in this week's announcement that the Singapore Exchange (SGX) has made a takeover offer for the ASX, which it values at A$8.4 billion.

This offer clearly shows that our capital markets, which are the lifeblood of a modern capitalistic economy, have fallen further and further behind the rest of the world and we may have to continue to go cap in hand to the Time-Warners of this world to maintain our standard of living.

The table shows that the NZX has fallen well behind the ASX and SGX total market capitalisation. This is important because stock exchanges are the main way a country's savings are channelled into areas where they are most effectively used.

If savings are low, capital markets are small. If these markets are small then companies are starved of capital and are undersized. As well, there is unlikely to be sufficient analytical expertise to ensure that savings are channelled into areas where they generate the highest returns for the investor and the country.

This was clearly evident during the finance company boom when financial intermediaries, many with few analytical skills, encouraged individuals to invest their savings in poorly run finance companies. Investors and the economy have suffered greatly as a result.

The NZX's capitalisation has increased by only 303 per cent in the 19 years to last December, compared with the ASX's 1051 per cent and the SGX's 1303 per cent.

The market capitalisation/GDP ratios of the three exchanges have evolved as follows:

* The total capitalisation of the ASX has grown from 33 per cent of GDP in December 1990 to 127 per cent at the end of last year.

* The SGX has risen from 88 per cent to 264 per cent of Singapore's GDP over the same period.

* The total value of the NZX increased from 20 per cent to 30 per cent of GDP between 1990 and 2009.

Not surprisingly New Zealand's total economic growth over this 19-year period of 63 per cent was much lower than Australia's 84 per cent and Singapore's 199 per cent.

Singapore has a population of 5,077,000; New Zealand has 4,384,000 and Australia 22,505,000.

The most depressing statistics are the value of shares traded or turnover figures, particularly between 2000 and 2009.

In that nine-year period the annual turnover, in US dollar terms, rose 311.3 per cent on the ASX and 157.8 per cent on the SGX but only 21.1 per cent on the NZX.

Looking at it another way, the turnover to market capitalisation of the ASX was 75 per cent last year, for the SGX it was 51 per cent and for the NZX 42 per cent.

Turnover is important as the exchange, and the brokers who trade through it, earn a large proportion of revenue from this source.

The low level of turnover on the NZX has encouraged New Zealanders to invest in Australia through the ASX. As well, New Zealand brokers are evolving into fund managers because of the low turnover in their traditional area of operation, and the NZX has diversified into funds management, registry services, publishing and other non-core activities.

Finally the figures on the number of listed companies is also extremely bleak for the NZX. The ASX had 1966 listed companies at the end of last year compared with 1136 in December 1990, the SGX had 773 compared with 172, and the NZX had 165 compared with 245.

The decline in the number of NZX listed companies is a major negative as far as the domestic economy is concerned because these entities create employment, place orders with suppliers, generate foreign exchange earnings, pay taxes and distribute dividends.

Time-Warner is unlikely to pay much tax or distribute dividends in New Zealand.

A study by the South African think-tank Centre for Development and Enterprise (CDE) says one of the major problems in South Africa and other African countries is that they have too few companies.

The number of companies listed on the Johannesburg Stock Exchange has plunged from 769 in December 1990 to 396 at the end of last year, and the CDE study claims that one-third of the South African workforce is unemployed because there are not enough companies.

The problem in New Zealand is that we have too little savings, tiny capital markets and too few big companies. Our companies are small because they don't have sufficient capital to fuel their growth.

Thus we are increasingly dependent on overseas capital and companies, including Time-Warner.

Why is the Government placing so much focus on The Hobbit movies and a party central on the Auckland waterfront for the Rugby World Cup?

Will it give Nuplex a cash payment to stop it migrating to Australia?

Why isn't the Government subsidising our offshore exploration activities as one shareholder suggested at this week's New Zealand Oil & Gas annual meeting?

Why are movies and a booze barn on the Auckland waterfront more important than a viable long-term economic strategy for the country?

The main issue is that the present Government and previous Governments have done little to establish a long-term viable economic strategy for the country.

We have had a host of advisory groups, committees and conferences but little action.

New Zealand will continue to drift until it can create an environment in which companies have access to capital and can grow.

Our political leaders must also stop treating Telecom and other large companies as if they are agents of evil.

The ASX/SGX deal was an eye opener because it makes us realise how far the NZX has dropped behind other exchanges. The takeover offer values the ASX at 57 times more than the NZX. Its value has become so small that it is doubtful that anyone would be interested in a deal with us.

NZX chief executive Mark Weldon started with a hiss and a roar but he seems to be running out of steam against huge headwinds, particularly our low saving rate, poor regulation and the tax advantages of property investment.

The situation has become so bad that the NZX has resigned from the World Federation of Exchanges to save itself the annual fee of $50,000. The NZX no longer contributes its information to the federation's large data base and did not attend the recent annual meeting in Paris where some of the details of the ASX/SGX deal were negotiated.

New Zealand's capital markets are struggling yet political leaders are more interested in appeasing big international corporations instead of making sure we have a large number of domestic organisations that generate jobs and create wealth.

We would have been able to driven a harder bargain with Time-Warner if we had more large listed companies and a stronger domestic economic base.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com