Brian Gaynor

Brian Gaynor on the sharemarket

Brian Gaynor: Exporters missing among top listed firms

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The potentially dominating presence of power companies - such as Meridian  and Genesis - among the largest NZX players could make it difficult for investors to diversify. Photo / Simon Baker
The potentially dominating presence of power companies - such as Meridian and Genesis - among the largest NZX players could make it difficult for investors to diversify. Photo / Simon Baker

The changing composition of the NZX over the past 30 years is a reflection of the New Zealand economy.

In 1981, the domestic sharemarket was dominated by private-sector, export-oriented companies. It is now ruled by former state-owned or monopolistic organisations.

Analysts now spend a great deal of time assessing government regulation; three decades ago we spent most of our time evaluating export markets and prospects.

The NZX's domination by regulated and monopolistic organisations is likely to increase with the proposed listing of Mighty River Power, Meridian Energy and Genesis Energy.

There are now seven former government or local authority owned companies in the 12 largest NZX companies list.

There is a strong possibility that ten of the largest 12 NZX companies will have their origins in the public sector after the three state-owned electricity generators are listed.

There is also a chance that six of the NZX's 10 largest listings will be electricity companies - Contact Energy, Vector, TrustPower, Mighty River Power, Meridian Energy and Genesis Energy.

The domination of electricity companies will make it difficult for investors, particularly large ones, to diversify their portfolios. It also raises the question as to why the NZX is ruled by monopolistic or near-monopolistic companies and has a dearth of large export-oriented organisations.

Most conversations between analysts and listed companies in the late 1970s and early 1980s focused on exports. This was in large part because of the export tax incentives scheme, which enabled companies to reduce their tax based on their level of exports.

Eight of the 12 largest listed companies at the end of 1981 had strong export orientations.

Fletcher Challenge, which had just been formed following the merger of Fletcher Holdings, Challenge Corporation and Tasman Pulp & Paper, was the largest NZX company.

NZ Forest Products was the second largest company.

Forestry dominated the NZX, and analysts spent much of their time analysing international pulp, paper and forestry markets and comparing our companies to the industry giants in North America and Scandinavia.

Wattie, Alex Harvey, Feltex, Waitaki-NZR, Carter Holt and UEB were other top-12 companies with a strong export orientation at the end of 1981.

Just outside this group were a large number of other foreign exchange earners including the meat companies, Fisher & Paykel Industries, Skellerup, Healing, Montana and others.

Ten years later the number of export focused companies in the top 12 had fallen from eight to two, Fletcher Challenge and Carter Holt Harvey.

This was not surprising as the Labour Government had abolished the export tax incentives, floated the New Zealand dollar and put a strong emphasis on curbing inflation by empowering the Reserve Bank.

As a result the New Zealand dollar became increasingly volatile making trading more difficult for exporters, particularly smaller ones with limited foreign currency management expertise.

As well, at the end of 1991 there were three NZX listed former state-owned enterprises - Telecom, Bank of New Zealand and Air New Zealand.

Ten years later the number of exporters remained unchanged at two - Carter Holt Harvey and Fisher & Paykel Healthcare (which had replaced the defunct Fletcher Challenge) - and there were four former publicly owned companies compared with three 10 years earlier.

The latest figures illustrate the changes to the NZX's twelve largest companies since 1981:

There are no export-oriented companies in this group against eight 30 years ago.

There are now seven former government or local authority-owned entities in the top 12 compared with none three decades ago.

There are several exporters on the NZX, including Delegat's, Fisher & Paykel Appliances, Fisher & Paykel Healthcare, Rakon and Sanford, but far fewer than there were 30 years ago. Analysts are much more likely to focus on electricity and telecommunications regulations these days than on export market potential.

For many this focus on regulation is far less interesting than the emphasis on foreign exchange earners before the economic reforms of Roger Douglas and the 1984 to 1990 Labour Government.

Not surprisingly New Zealand's export growth has been much slower than the world average since 1981.

According to World Trade Organisation statistics, world exports have increased by 7.6 times since 1981 while New Zealand's exports have increased only 5.6-fold.

As a result New Zealand's share of world trade has fallen from 0.28 per cent to 0.21 per cent over the past 30 years.

One of the main reasons for this is that New Zealand has been unable to diversify away from agriculture which still accounts for 62.3 per cent of our total exports compared with 70.3 per cent in 1981.

Argentina has reduced its dependency on agriculture from 71.8 per cent of exports to 50 per cent over the same period and its total exports have risen 7.6 fold.

As a general rule, countries that continue to depend on agricultural products have had lower export growth than countries that have diversified away from land-based products.

Australia's exports have grown 9.9 times over the past 30 years as the country has diversified away from agriculture to mining resources. Agriculture is now 12.7 per cent of total exports compared with 44.4 per cent in 1981, while mining has grown from 50.4 per cent to 61 per cent of exports over the same period.

The heavy reliance on agricultural products has not disadvantaged New Zealand in recent years because of high commodity prices.

But our international debt levels have continued to climb during this buoyant period and the current problems with kiwifruit demonstrate that land-based products are susceptible to disease, tariff barriers and other unforeseen problems.

The country's inability to diversify away from agriculture has had negative implications for the NZX as most agriculture enterprises, particularly farms, are not suitable for stock exchange listing.

This is because farm prices are too high, annual returns are low and the most of the benefits come from long-term, tax-free capital gains.

This is not an attractive valuation creation model for a listed vehicle.

As a consequence, it can be argued that the agriculture sector is growing below its potential because it does not have access to sharemarket capital.

The debate over Fonterra's share capital and listing on the NZX is a good example of this.

The farmer shareholders would prefer to maintain full control over the co-operative and deprive it of capital, instead of allowing outsiders to contribute badly needed permanent capital and obtain a small minority shareholding.

One cannot help but get the impression that the main aim of the co-operative is to maximise the milk price paid to farmers rather than focusing on export growth.

Thirty years ago most of Fonterra's announcements would concentrate on export growth and export markets instead of the milk price emphasis that exists today.

The NZX badly needs more export-orientated companies but where will they come from?

Electricity generators are fine, but they are subject to a high level of regulation and have limited growth prospects.

Exporters have far better growth prospects but are also riskier as demonstrated by the volatile share price performances of Fisher & Paykel Healthcare and Rakon in particular.

Investors need a variety of risk opportunities, and the NZX won't offer this while it remains dominated by large domestic-orientated utilities and has limited foreign exchange earning companies.

The New Zealand economy will also struggle to achieve world average growth until we have more large non-agriculture foreign exchange earners.

Brian Gaynor is an executive director of Milford Asset Management. bgaynor@milfordasset.com

- NZ Herald

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