NZ Herald business editor at large

Liam Dann: NZX on fire but 1987 it ain't


Both New Zealand and the US are now in the grip of the biggest IPO boom for years.

The Dow Jones in the US has also being rising steadily, with a bumper crop of 91 companies listing in the three months to June 30. Photo / AP
The Dow Jones in the US has also being rising steadily, with a bumper crop of 91 companies listing in the three months to June 30. Photo / AP

The NZX hasn't been this busy since 1987.

Awkward pause. Touch wood.

Yeah, okay, that's a loaded way to make the point about the staggering rush to market we have seen over the past 18 months. Shares prices aren't exactly going crazy and investors are a lot more savvy than they were in 1987. Fund managers aren't buying stories that don't stack up and they are playing hard ball on price. We also have much better regulation.

But in terms of the sheer number of companies queuing up to list on the NZX, things are booming. Outside of the 1980s only the year 2000 was stronger (and only if you count the tiddlers listing on now defunct New Capital Market). Halfway through this year and we're already on track for in excess of a dozen stock market floats.

We had 10 list last year and if investor demand holds up we could go close to 20 this year.

Four companies have listed already, another six have confirmed they are. There are at least five more tipped - for whom talks with bankers are more or less an open secret. There will certainly be more names to come.

So this is a boom although it is not yet an unseemly scramble.

Years of effort by those in government, the investment community and the NZX have gone into creating the right environment for stockmarket growth.

Now with conditions right those efforts are paying off. We have KiwiSaver growing the pool of investment capital and demand for stocks. We have a solid market which is inspiring confidence and is now delivering a steady supply of new investment options.

How long we'll be in this sweet spot for both supply and demand is anyone's guess. As long as Wall Street holds firm there may be some way to go yet.

In the end the really nasty meltdowns, like the 1987 crash, are out of our control.

The best we can do is ensure that solid investment fundamentals are in place and that the stocks listed on our market have solid reasons for being - beyond market speculation.

As much as it may seem painfully bearish to be talking about 1987 there are concerns being raised in the US about the exuberance of Wall Street.

In the US this week it was reported that the number of IPOs for the second quarter was the highest since 2000, the year of the crash. To put the NZX boom in perspective, the US saw 91 companies list in the three months to June 30, according to a report by EY. That was up from 62 in the same quarter last year and 33 in 2012.

Meanwhile, the Dow Jones Index finished last week bang on 17,000, a number it has never touched before.

It is not that the market is spiking but it has been rising steadily while the economic recovery has stuttered on in a two steps forward, one step back kind of way. Friday was a two steps forward day with strong US job numbers sparking optimism that the recovery was moving up a gear. Just a week earlier it was a step back, with weaker than expected GDP for the first quarter. The big risk is that bullish, forward-looking investors push corporate values too far ahead of the real-world earnings. It is normal that markets should look forward and good for economic growth when they are optimistic.

If businesses want to raise capital, and can raise capital, then they can expand and employ more people. But time and time again we have seen markets get lost in their own hype and lose touch with the real world.

If the economy fails to keep up and the distance between market value and corporate earnings gets too wide, then we risk a correction, a rapid fall in market value. A strong market should handle that. At this stage there is no reason to assume the NZX couldn't.

Whether a correction turns into a crash has a lot to do with quality of the companies on the market. When a boom is underpinned by companies with faulty business models as it was with the crash you have problems.

Or worse, as in 2008, if it is underpinned by secondary investment products tied to a property bubble you've got really big problems.

Next week marks the beginning of corporate earnings season in the US. In New Zealand the results will flow a few weeks later. Expect the scrutiny to be intense.

- NZ Herald

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NZ Herald business editor at large

Liam Dann is business editor at large at the New Zealand Herald. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy. He hosts The Economy Hub video show every Thursday.

Read more by Liam Dann

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