Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: New Zealanders buy back their sharemarket

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Australian company OneSteel's sale of its 50 per cent interest in Steel & Tube has contributed to the fall in overseas ownership of the New Zealand sharemarket. Photo / APN
Australian company OneSteel's sale of its 50 per cent interest in Steel & Tube has contributed to the fall in overseas ownership of the New Zealand sharemarket. Photo / APN

The latest sharemarket ownership figures, which have been compiled by Goldman Sachs, show that we are buying back the NZX.

Domestic investors now own 67 per cent of the market compared with 65 per cent a year ago, 64 per cent in 2010 and only 46 per cent in the mid-1990s.

The drop in overseas ownership from 35 per cent to 33 per cent over the past 12 months has mainly been due to the following transactions:

• Fairfax divested its remaining 51 per cent Trade Me stake.

• Quadrant reduced its Summerset holding by 23 per cent.

• OneSteel sold its 50 per cent interest in Steel & Tube.

• News Corp disposed of its 44 per cent stake in Sky Television.

• Overseas institutions reduced their interests in Chorus.

Ebos was the only large company to experience a significant increase in overseas shareholding when Zuellig took a 40 per cent stake as part of the Symbion acquisition in Australia.

The ebb and flow of overseas ownership of NZX-listed companies tells us a great deal about our response to the way our sharemarket has been governed and regulated over the past few decades.

Before 1987 there was almost no overseas involvement with the notable exception of a number of listed companies that were majority owned by Northern Hemisphere multinationals. These included Alcan New Zealand, Dunlop New Zealand, Firestone NZ, ICI New Zealand, Ivon Watkins-Dow, Rothmans Industries, Woolworths (New Zealand) and Wormald International NZ.

Only Alcan, Firestone, ICI and Ivon Watkins-Dow remained listed at the end of 1986.

There was no detailed analysis of the sharemarket's ownership before 1987 but we can confidently say New Zealand investors held at least 95 per cent, or $40 billion, of the NZX's total capitalisation of $42.4 billion on December 31, 1986.

New Zealanders deserted the sharemarket in droves after the 1987 crash and overseas interests took advantage of our many low-priced listed companies.

The first detailed survey, in December 1989, showed overseas ownership had surged from less than 5 per cent in 1986 to 19 per cent three years later. It subsequently soared to 54 per cent in 1995 for a number of reasons, including:

• The Crown sold controlling stakes in former state-owned-enterprises to overseas interests and these companies subsequently listed on the NZX with these non-New Zealand investors holding majority stakes. This included Air New Zealand and Telecom, although Tranz Rail was not listed until 1996.

• Overseas institutions also accumulated large shareholdings in Telecom.

• International Paper lifted its Carter Holt Harvey stake to over half.

• Irish interests acquired 28 per cent of Wilson & Horton.

• Fletcher Forest attracted a large number of overseas shareholders.

At the end of 1995 the total value of the New Zealand sharemarket was $49 billion, compared with $42.4 billion nine years earlier.

However, as local investors had reduced their ownership of the market from 95 per cent to 47 per cent in the same period, the total value of their NZX holdings had fallen from $40 billion at the end of 1986 to just $23 billion in December 1995.

This massive loss of confidence in the NZX was primarily due to inadequate regulation, particularly as far as the protection of individual shareholders was concerned.

The Business Roundtable was at the height of its power in the mid-1990s and aggressively, and successfully, opposed the introduction of regulation that would have protected retail investors.

For example, the Takeovers Act was passed in 1993 but the Cabinet had to approve a Takeovers Code before the act became effective. A number of free-market ministers, notably Ruth Richardson and Bill Birch, opposed the new rules and a Takeovers Code was not approved until a Labour Government was elected in 1999.

Thus, the new takeover rules did not become effective until mid-2001 even though the act was passed eight years earlier.

Takeover rules and regulations were the main battleground between the free-market proponents, which included the NZX as well as the Roundtable, and those who wanted some protection for individual shareholders.

The free-market supporters argued that takeover rules protected inefficient managers by making it more difficult to take over poorly governed and managed companies.

The NZX chairman and managing director supported the Business Roundtable even though retail investors were deserting the market in droves because of inadequate regulation and companies were delisting after successful takeover offers.

The legacy of this absurd stance by the NZX remains today as many large private companies refuse to list because they believe they will become an easy takeover target even though the environment is totally different, and far more enlightened, than the dark days of the mid-1990s.

The implementation of the Takeovers Code, the formation of the New Zealand Superannuation Fund and the demutualisation of the NZX in the early 2000s were watershed events as far as the domestic sharemarket is concerned.

New Zealanders' confidence in the market began to improve and by 2005 overseas ownership had declined to 44 per cent compared with 54 per cent 10 years earlier.

Ironically, one of the reasons for this was the poor performance - and declining market value - of Telecom, which was almost 70 per cent overseas owned.

The next significant event was the introduction of the PIE and KiwiSaver regimes in October 2007. These attractive investment vehicles are the main reason New Zealand-managed funds now own 23 per cent of the domestic market compared with only 16 per cent in the mid-2000s.

Overseas ownership of the domestic market, particularly as far as strategic stakes are concerned, has continued to decline in recent years for a number of reasons, including:

• Canadian-based Garlow Management sold down its stake in Ryman Healthcare.

• Infratil purchased Shell, including its NZ Refining holding, and the latter holding is now considered to be New Zealand-owned.

• Cavotec - which was largely overseas-owned - delisted.

The latest Goldman Sachs survey shows that overseas investors now own 33 per cent of the domestic sharemarket compared with more than 50 per cent two decades ago. This downward trend is expected to continue as PIE and KiwiSaver funds get bigger and bigger and New Zealanders become more comfortable with long-term equity ownership.

However, the sharemarket is still a long way behind residential property as far as our preferred investment vehicle is concerned.

For example, in mid-2013 New Zealand investors owned 67 per cent of a domestic sharemarket worth $72.9 billion. Thus New Zealanders' investment in the NZX has gone from $40 billion in 1986 to $23 billion in 1995 and $49 billion in the latest survey.

Meanwhile, the total value of the country's residential housing stock has surged from $81 billion in 1986 to $183 billion in 1995 and $690 billion a few months ago, according to Reserve Bank figures.

More and more of our personal wealth is tied up in residential property as the ratio of house values to the amount we have invested in the NZX has gone from 2.0 times in 1986 to 14.1 times by mid-2013.

New Zealanders also have bank deposits, domestic bonds and overseas financial assets but the recent rise in exposure to the NZX has been dwarfed by the explosion in residential property values.

Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular 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 Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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