Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: It's up to Bennett to take NZX to higher level

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Mark Weldon, departing boss of NZX, did wonders during his tenure. Photo / Natalie Slade
Mark Weldon, departing boss of NZX, did wonders during his tenure. Photo / Natalie Slade

Two weeks ago this column looked at Mark Weldon and the NZX's performance under his stewardship.

It concluded that the company had performed extremely well during his tenure but that he had polarised opinion, as do most major game changers.

However, the debate hasn't ended as a number of emails - and Herald website comments - claimed that the column only looked at the NZX as a company, not at the NZX as a stock exchange.

They argued that the NZX had shrunk under Weldon's tenure - in terms of listed companies and total market capitalisation - and, as a result, he has not been a success as far as the development of the domestic sharemarket is concerned.

To assess this issue, we need to go back 25 years or more to when the NZX was mutually owned by its members. We can then compare this period with its performance since 2002 when Weldon became chief executive and the organisation was demutualised.

At the end of 1986 there were 273 New Zealand companies listed on the sharemarket. This compared with a previous 10-year high of 255 in 1976 and a low of 205 in 1982.

The mid-1980s period was characterised by creative accounting, shonky related party transactions, hyped up IPOs, share price manipulation and insider trading.

New Zealand had a light-handed approach towards regulation, with individual professional bodies responsible for their own rules and regulation.

The stock exchange and its members were not interested in self-imposed restraints because they were making far too much money in the unregulated environment.

The 1987 crash had a devastating impact on the NZX, far greater than for any other country. The total market capitalisation of the NZX plunged from $42.4 billion at the end of 1986 to just $15 billion four years later.

This wealth destruction was much, much worse than that experienced by finance company investors in recent years.

The number of listed domestic companies nosedived from 273 at the end of 1986 to 146 in December 1991 and just 135 four years later.

The NZX board and management stuck their heads firmly in the sand after the '87 crash.

One of their prime objectives was to vigorously oppose any form of regulation, including the introduction of a Takeovers Code.

This code, which was essential to restore investor confidence following the '87 crash, was strongly supported by retail investors.

The exchange also did nothing to promote new listings as it believed that this was the responsibility of broker members.

However, the structure of the broking industry changed substantially following the '87 crash as illustrated by the accompanying table.

The number of broking firms declined from 75 at the end of 1986 to 46 nine years later and only 37 when Weldon became chief executive.

More importantly, the broking sector became more and more dominated by overseas-controlled firms.

These included ABN AMRO, Credit Suisse First Boston, Deutsche Securities, JP Morgan Securities, JBWere, Macquarie Equities, Salmon Smith Barney and UBS Warburg.

Most of these overseas controlled stockbrokers had no interest in promoting the sharemarket listing of small- and medium-sized domestic companies.

Their primary objective was to promote trans-border trades in large capitalisation companies.

Thus when Weldon took over in mid-2002 the NZX was on its knees.

The number of listed companies had fallen from 273 at the end of 1986 to just 146 and the total market capitalisation was only $41.4 billion compared with $42.4 billion in December 1986.

By comparison, the number of ASX listed companies had risen from 1134 to 1355 over the same period and its total market value had surged from A$137.1 billion to $672.8 billion.

At one stage it looked as if the NZX would be either taken over by, or would merge with, the ASX.

The NZX has continued to lag behind the ASX in recent years but the major damage was done in the 1986 to 2002 period.

Weldon inherited an ailing organisation and has nursed it back to life. It is now in a great condition for new chief executive Tim Bennett to take it forward. The NZX hasn't made much progress in terms of listed companies or total capitalisation in recent years but is Weldon to blame for this?

Did Weldon recommend shareholders to accept takeover offers for Carter Holt Harvey, Frucor Beverages, Independent Newspapers, Natural Gas Corporation, Ports of Auckland, Waste Management and WestpacTrust Investments? These were all benchmark index companies.

Has Weldon been responsible for the poor performance of Fletcher Challenge Forests, Fisher & Paykel Appliances, Guinness Peat Group, Rubicon, Telecom and Tranz Rail?

Did Weldon encourage Baycorp Advantage and Lion Nathan to move to Australia and for shareholders to accept subsequent takeover offers?

Was Weldon responsible for the Feltex debacle and the failure of a number of finance companies with securities listed on the NZX?

The obvious answer to all these questions is no, the market capitalisation of listed NZX companies reflects the overall performance of domestic companies. Weldon has had no influence over the performance of these companies.

Weldon and his management team have tried to convince companies to list on the NZX.

However, New Zealand doesn't have a large number of companies in a position to list and investors switched off the NZX in the 1990s and diverted their savings into residential property.

The ASX has been a huge beneficiary of compulsory superannuation, which was introduced 20 years ago, whereas KiwiSaver is only five years old.

Australians have A$1476 billion of managed funds of which A$592 billion are invested in domestic equities.

By comparison New Zealanders have $75 billion of managed funds with only $8 billion invested in domestic shares.

It is far easier to have a buoyant sharemarket where there is a large pool of domestic savings.

It would be difficult for anyone, including Mark Weldon, to dramatically grow a share market if individuals are not saving.

The only option in the latter situation is to attract overseas investors.

However, offshore investors seem to be more interested in acquiring 100 per cent of our companies.

This is at least partly due to inconsistent and knee-jerk regulation that has dramatically increased the risk associated with portfolio investment in our large infrastructure and utility listed companies.

If there was a strong demand for companies to list, and for individuals to invest in domestic companies, then we would expect Sharemart and Unlisted, two other share trading platforms, to take advantage of the NZX's poor performance. But this is not the situation.

Sharemart was established by Computershare in May 1994 and had 14 companies on its trading platform 12 months later.

It now has only nine companies and these are rarely traded.

Unlisted was established in mid-2003 but has also struggled to gain momentum. It is owned by Efficient Market Services which has a number of prominent shareholders, including former NZX chief executive Bill Foster and members of the old stock exchange.

Eighteen companies are quoted on the Unlisted trading platform, although most of these are rarely traded. The best known are King Country Energy, Rural Equities and Skyline.

The truth of the matter is that there isn't a great appetite for share investments in New Zealand, mainly because of the disastrous stewardship of the NZX in the two decades leading up to 2002.

Mark Weldon has revitalised the NZX but there is still a long, long way to go.

He has left the company, and the market, in a strong position for the new chief executive Tim Bennett to take it to a higher level.

That is exactly what the NZX's board of directors wanted Weldon to achieve.

Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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