NZ sharemarket at risk of extinction, strategist

Bernard Doyle, strategist and executive director at JB Were. Photo / New Zealand Listener

The New Zealand equity market is at risk of extinction, says Bernard Doyle at JB Were Investment Strategy Group in a submission to the Savings Working Group.

"The current lack of IPOs (initial public offers), waning international interest and poor market liquidity are not simply a post-recession pause," Doyle said.

"They are indicative of an equity market in structural decline, which has become self-perpetuating."

His industry experience suggests the equity market's decline is more advanced than many outside observers perceive, Doyle said.

"The transition from slow steady decline to a rapid irreversible wind-up may prove surprisingly rapid," he said.

The local equity market's share of the economy has dropped from 56% 15 years ago to 29 per cent now while other equity markets have grown.

"Two types of economies tend to have an equity share of GDP at around the 25 per cent to 50 per cent level: emerging economies (for example, Colombia and Turkey) or advanced economies in a downward spiral (for example, Ireland and Greece)."

Doyle said there is no reason a well-structured, small, effective equity market can't grow in line with, and assist the development of the New Zealand economy.

"The domestic bond market shows that even a small, retail-heavy market can provide capital at a competitive price to the corporate sector."

But he doesn't think the domestic equity market can recover critical mass without public policy support.

He sees considerable scope for public policy to both improve the quality of savings behaviour and to return the sharemarket to a self-sustaining development path.

He is recommending the government should resume its contributions to the New Zealand Superannuation Fund, even if it was at a much reduced rate.

The government could use funds from selling state-owned enterprises
(SOEs) to make contributions to the fund, Doyle said.

The National Party-led government has pledged not to sell SOEs during its current term.

Doyle also recommends the fund's mandate should include it taking cornerstone stakes of 10 per cent or more in strategic domestic assets such as ports, airports and banks.

He also recommends the Overseas Investment Office should specifically target the impact of foreign investments on New Zealand capital markets.

"New Zealand needs to drop its peculiarly New Zealand attitude of not offending the overseas investment community. Most other advanced economies behave in an overtly self-interested manner when it comes to ownership of strategic assets."

Other recommendations include partial listings of "non-core"
SOEs such as coal company Solid Energy, government action to encourage banks to list their New Zealand arms and making Kiwisaver compulsory.