Investment columnist for the NZ Herald

Brian Gaynor: NZ sharemarket continues to lag behind the rest of the world

The clear message is that the NZX either drags itself into the 21st century or it will be the subject of a takeover offer from the ASX. Photo / Mark Mitchell
The clear message is that the NZX either drags itself into the 21st century or it will be the subject of a takeover offer from the ASX. Photo / Mark Mitchell

Global statistics for last year clearly demonstrate that the New Zealand sharemarket continues to lag behind the rest of the world in terms of size, liquidity and the ability to attract new listings.

This has an important impact on the domestic economy as highlighted by the Capital Market Development Taskforce, which published its final report in December 2009.

The Taskforce, which was chaired by Rob Cameron, firmly believed that capital markets are important because they allow companies to attract new equity, they provide incentives for companies to raise their performance and allow individuals to diversify their portfolios away from residential property.

The Taskforce's final report, which compared New Zealand with Australia, Denmark, Finland, Ireland, Norway, Singapore, Sweden and Switzerland, concluded that "there is a significant body of international evidence that shows capital market development leads to more investment, higher labour productivity and faster economic growth".

In light of this, how did the New Zealand sharemarket compare with these eight small developed countries in 2016?

The first row in the accompanying table shows that the NZX was the smallest sharemarket at the end of 2016 with a value of just US$82 billion. It represented just 1.6 per cent of the total sharemarket values of the nine countries. (The Danish, Finnish and Swedish sharemarkets have amalgamated as the Nasdaq OMX Nordic).

In terms of sharemarket value to GDP, New Zealand ranked second from the bottom with a 47 per cent ratio, just ahead of Ireland with a 43 per cent ratio at the end of 2016.

In terms of the number of domestic listed companies, the ASX is well ahead with 1,969 followed by the Nasdaq OMX Nordic with 900, Singapore 479, Switzerland 227, New Zealand 173, Norway 171 and Ireland with only 40 listed domestic companies.

However, Dublin has attracted 5,765 listed investment funds, which are not included in the total sharemarket value figures, while the NZX has only 11 listed funds according to World Federation of Exchanges statistics.

The IPO statistics indicate that the NZX will continue to have a relatively low level of listed companies, as there were only three IPOs last year compared with 92 on the ASX and 60 on the Nasdaq OMX Nordic. The Oslo and Dublin exchanges also struggled to attract new listings last year.

Another point to note is that the average value of NZX-listed companies is low compared with other countries. The average value of a listed Swiss company was US$6.2b at the end of 2016, an Irish listed company $3.0b, Nasdaq OMX Nordic $1.4b, Norway $1.4b, Singapore $1.3b, Australia $0.7b and New Zealand $0.5b.

Finally, the turnover figures for the 2016 calendar year illustrate a similar story for the NZX.

As the accompanying table shows, the NZX had the lowest turnover, in terms of value, with just US$29b last year. This was 40 per cent lower than the Irish sharemarket, the second lowest in terms of trading value.

The NZX's liquidity is low both in relative, as well as absolute terms. Its trading value to year-end market value ratio was just 35 per cent in 2016 compared with 30 per cent for Singapore, 40 per cent for Ireland, 47 per cent for Norway, 61 per cent for Switzerland, 62 per cent for the Nasdaq OMX Nordic and an impressive 69 per cent for Australia.

The ASX has been extremely successful in attracting new listings, including New Zealand companies, whereas the NZX's management team has been more focused on acquiring Australian commodity trading platforms and New Zealand fund managers.

In addition, it has made no attempt to change New Zealand's archaic trading rules that enables a small number of brokers to effectively control the market through negotiated off-market trades.

As the accompanying figures demonstrate, 62 per cent of NZX trades by value were off-market trades in 2016 compared with 47 per cent in Ireland, 10 per cent in Australia and Norway, 9 per cent on the Nasdaq OMX Nordic, 1 per cent in Switzerland and nil in Singapore.

These negotiated or off market trades - also called crossings - occur when brokers match buy and sell orders without putting them through the market.

This gives the small number of New Zealand brokers a huge advantage over other market participants, particularly brokers that operate their own proprietary book or have large private wealth operations.

These archaic trading rules have had the following impact on the domestic sharemarket:

• NZX market liquidity is low and price discovery is poor.

• There are huge barriers to entry as far as new brokers are concerned and the number of NZX brokers continues to decline year after year.

• New listings are discourage because there are fewer and fewer brokers to facilitate these listings and the few remaining brokers offer inadequate post-listing advice to new companies.

• New Zealand companies are encouraged to list on the ASX because they experience far greater market liquidity post-listing across the Tasman.

The best markets are fully transparent markets where all buy and sell orders can be seen, and are available to all market participants.

The most frustrating aspect of these issues is that they have been clear for a long, long time - as illustrated by the accompanying table - but nothing has been done about them. Our capital markets have made huge progress, particularly in terms of investor protection, since the release of the final Capital Market Development Taskforce report in 2009, but the NZX, the country's main capital market, still has the characteristics of an exclusive club.

The best markets are fully transparent markets where all buy and sell orders can be seen, and are available to all market participants. This is definitely not the situation on the NZX and, while New Zealand investors are all dressed up and ready to join the investment party, NZ brokers don't welcome them with open arms. As a consequence, New Zealanders are investing more and more offshore, as demonstrated by our KiwiSaver statistics.

These developments are detrimental to the best interests of the New Zealand economy and also demonstrate why New Zealand companies are easy pickings for foreign predators.

Finally, how successful have our capital market developments been in terms of reducing our reliance on residential property, the dominant asset class for most New Zealand households? The following figures address this issue:

• In 1985 the total value of NZ residential property was $73b compared with the NZX's total market capitalisation of $18b, a ratio of 4.1 times.

• In 2000 NZ residential property was worth $232b compared with the NZX's $42b, a ratio of 5.5 times.

• At the end of 2016 our residential property was worth just over $1 trillion and the NZX $115b, an 8.7 times ratio.

Meanwhile, Australian residential property is worth A$5.84t at present, according to the Reserve Bank of Australia statistics, while the ASX has a total market value of A$1.7t -- a ratio of 3.4 times.

Huge progress has been made in the post-Capital Market Development Taskforce period in terms of investor protection and transparency but there is a massive amount of work to be done in relation to the NZX.

The clear message is that the NZX either drags itself into the 21st century or it will be the subject of a takeover offer from the ASX.

It is hugely frustrating to admit that the ASX is doing a far better job promoting itself to retail investors and small companies than the NZX.

- NZ Herald

Brian Gaynor is an executive director of Milford Asset Management which holds shares in NZX on behalf of clients.

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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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