It turns out that the Capital Markets Development Taskforce has been a catalyst for both policy makers and market participants. The issues it exposed and addressed are being resolved - some by policy response, some by market responses and some by a combination of the two.
The taskforce produced its report, Capital Markets Matter, in December 2009. It was initiated by Lianne Dalziel, pushed forward by Simon Power and well led by Rob Cameron.
It sought to develop a blueprint for New Zealand's capital markets.Those working in the capital markets understood that markets mattered. But financial system failures and the poor outcomes experienced by some retail investors had undermined trust and confidence. It was also apparent that markets were not always channelling investor funds to their most productive use. So the taskforce report addressed how we could improve retail investor outcomes and enhance the effectiveness of our capital markets as "an engine" of economic growth.
Three years on, our financial markets are in a much better place. A number of the market's foundations have been rebuilt, and market outcomes are improved.
New Zealand's equity market produced a strong rally in 2012 with the NZX50 rising 24.2 per cent. Factors underlying the rally include low interest rates, strong terms of trade, relatively healthy public accounts, increased offshore interest in a gradually recovering economy and the listing of Fonterra units. The performance suggests that our markets, as a system, are working better. In particular it has been putting users and providers of capital together with impressive efficiency.
Over the fourth quarter of 2012 there was a surge in activity on the NZX.
Telecom, Air New Zealand and GPG bought back stock, while the Warehouse and Tower bought and sold assets. There were also a number of private market transactions. In contrast to the high level of equity capital activity, the number of debt issues were relatively few. Banks even called back listed subordinated debt.
Within this mix of activity you can see investors seeking yield, companies raising money for growth, entrepreneurs releasing capital, owners selling to rotate resources into new assets, higher value owners buying companies and companies returning capital to investors. The market is doing what it should - providing a platform for providers of capital to get together with users of capital - and it has been doing it well.
On the policy front a number of the market's design flaws and shortcomings identified by the taskforce have been addressed. NZX has a new clearing system, regulatory oversight has been widened and stepped-up via the Financial Markets Authority (FMA), new legislation to improve the investor environment and functioning of the capital market has either been enacted (Financial Advisers Act) or is pending (Financial Markets Conduct Bill).The uptake and growing role of KiwiSaver has been a pleasant surprise. It is evolving into an important component of our market.
Among the pleasing aspects of the 2012 year was the evolution of the model that is developing for faster growing companies. A lot of time has been invested in looking for the silver bullet that would solve what the CMDTF talked about as a "birth rate problem", or the lack of new listings. A range of "interventions" were considered. However, in the intervening period, the market has begun solving the problem of how to deliver the growth capital that these companies need. I am aware of a number of young/fast growth firms that are considering either pre-IPO funding or intending to come to market to IPO in 2013. As touched on by the taskforce there is the potential to further leverage the NZX's infrastructure to create efficient "stepping stones" to public markets for these fast growth companies. This might be in the form of a less onerous option than the board offers.
There has been a lot of progress, but we are far from producing the finished product. Here are a few things that might be worthy of further work.
Regular review of the system is important - do not fiddle, rather be systematic in our ambition to improve.
Financial literacy remains important. The Sorted website has some fantastic tools to help New Zealanders take personal responsibility for their savings and financial affairs. It is possible that as KiwiSaver evolves and if Self-Managed Superannuation becomes an option, that it will emerge as something that empowers individuals in this regard.
KiwiSaver is great initiative but our savings framework is not fully developed. A review of KiwiSaver default settings will likely enhance the current scheme. I would go further and establish a multi-decade framework that dealt with compulsion, age of retirement, means testing for pensions, Self-Managed Super and all of the other major policy variables in this area. New Zealanders need to know the consequences of doing nothing, doing the minimum KiwiSaver contribution or doing more than that.
* Tomorrow: FMA boss Sean Hughes .
Scott St John is chief executive and a managing director at First NZ Capital.