Brian Gaynor: NZX left in the dust

Xero's decision to delist from the domestic sharemarket has focused attention on the NZX. Photo / Bloomberg

Xero's decision to delist from the domestic sharemarket has focused attention on the NZX, particularly in relation to the recommendations of the Capital Market Development Taskforce.

The Taskforce was established in July 2008, on the day Fletcher Building revealed it was under pressure to shift its head office and primary listing to Australia.

The high-powered group, which was chaired by Rob Cameron and reported in December 2009, identified several NZX issues including the market's low liquidity and a paucity of new listings. It believed a healthy sharemarket required more listed companies and made several recommendations to help achieve this.

The accompanying table illustrates a major reason why the Taskforce was established.

The total number of NZX listings had plunged from 466 at the end of 1987 to only 165 in December 2009 when the Taskforce report was released. This represents a reduction of 145 domestic listed companies and a plunge of 156 foreign listings.

The 178 foreign listings at the end of 1987 were mainly large Australian industrial and mining companies.
By contrast, total ASX listings had increased by 513, from 1453 to 1966, over the same 22-year period.

Most of the 178 foreign companies on the NZX in 1987 were dual-listed Australian companies, while a high percentage of the 133 foreign companies on the ASX at present are dual-listed New Zealand companies.

There has been a slight pickup in NZX domestic company listings since the end of 2009, but the ASX has clearly outperformed the NZX in terms of both domestic and foreign company listings over recent decades.

Several additional statistics illustrate the relative performances of the NZX and ASX over the past 30 years:

• The total market capitalisation of the NZX has increased from $24 billion at the end of 1987 to $49b at the end of 2009 and $126b on September 30. This represents a 5.2 times increase over the 30-year period.

• Meanwhile, the total value of the ASX has soared from A$141b ($156.2b) to A$1788b in the 1987 to 2017 period, a 12.7 times increase.

• Market liquidity, which is defined as domestic share trading value to total market value on an annualised basis, is 66.9 per cent on the ASX this year compared with 32.3 per cent on the NZX.

• The NZX has also missed out on the popularity of Exchange Traded Funds (ETFs), or passive funds, as only $200m of these have been traded on the domestic market in the first nine months of 2017, compared with A$12.6b on the ASX.

The NZX continues to slide down the global sharemarket ladder, ranked in terms of total market value, and is now in 46th position behind exchanges in Belarus, Vietnam, Peru, Iran, Colombia and other countries that had minuscule or no stock exchanges 30 years ago.

The Capital Market Taskforce had the following goals: "We would like to see 10 to 20 new companies growing to greater than $100 million in earnings over the next 10 years, with five going on to be billion-dollar companies. We want to see our public markets double in size over the next five years."

The Taskforce report noted: "New Zealanders do not have as many opportunities to invest in large and mature local companies as do investors in many other countries because around a third of New Zealand's largest 200 companies are listed companies, while in Australia it's around two thirds."

The government came to the party by establishing the Financial Markets Authority (FMA) and listing Meridian Energy, Mercury NZ and Genesis Energy but it hasn't adopted the Taskforce's recommendation to establish a Minister of Capital Markets.

The NZX's commitment to the Taskforce's recommendations has been less convincing, as it has been distracted by legal issues in Australia, has made a major fund management acquisition and has failed to establish and enforce transparent share trading procedures for stockbrokers.

Finally, the broking sector has also diversified into fund management and private wealth. Brokers seem to be more concerned about maintaining the sharemarket's flawed trading rules, which discourage the establishment of new broking firms, rather than expanding the market.

These issues are illustrated by the NZX, ASX and Xero market turnover figures which highlight the small number of NZX stockbrokers and high percentage of off-market trading.

For the first nine months of 2017, only 35 per cent of NZX trades in value were though the electronic market, according to World Federation of Exchanges statistics, compared with 66.1 per cent on the ASX.

There are two clear issues with off-market trading:

• Market prices do not fully represent the intentions of all buyers and sellers, as over 50 per cent of orders, in value terms, are not placed through the electronic market. This can lead to significant mispricing. Last week, Xero told an analysts' meeting that a major reason for its NZX delisting was the reluctance of many global fund managers, including Fidelity Investments and T. RowePrice (with combined funds under management of US$7148b), to trade through the NZX because of the low level of on-market trading and poor transparency.

• The huge level of off-market trading makes it extremely difficult to establish a new broking firm.

Xero's trading data illustrates the main characteristics of the NZX, particularly compared with the ASX.

There have been $2.3b worth of Xero shares traded on the NZX this year, with First NZ Securities (FNZ) accounting for 50.9 per cent of these transactions by value. This compares with FNZ's overall 39.2 per cent share of NZX trading.

One view is that FNZ is the best broker and it has earned its dominant market position, particularly as far as Xero is concerned. Another opinion is that FNZ's dominance is a negative for the NZX, particularly considering the huge amount of off-market trading on the NZX and its low liquidity.

Another issue with the NZX is the small overall number of brokers, with only seven trading Xero stock this year. These are: FNZ; Craigs Investment Partners; UBS; Macquarie; Forsyth Barr; ASB; and ANZ Securities.

By contrast, there has been A$800m worth of Xero shares traded on the ASX this year, involving 53 brokers. Credit Suisse has the highest Xero market share across the Tasman - 24.3 per cent of trading by value.

A major objective of the Capital Market Development Taskforce was wider participation by individual investors in the country's financial markets. These Xero figures indicate that this has not yet been achieved:

• There have been 96,008 Xero trades on the NZX this year, worth a total of $2.29b, for an average value of $23,900 per trade.

• There have been 309,412 Xero trades on the ASX this year, worth A$800m, for an average of A$2600 per trade.

The low value per trade for Xero on the ASX, A$2600 compared with $23,900 on the NZX, and the number of brokers trading - 53 trading Xero compared with only 7 on the NZX - indicates that our market structure and rules don't encourage individual participation or new broker formation.

Large global fund managers are also reluctant to invest through the NZX because of a lack of transparency and the potential for mispricing due to the large percentage of off-market trading.

Pushpay's announcement on Thursday that it was considering a listing in the US was another blow for the domestic sharemarket and the NZX's investor presentation later that day was full of laudable aspirations but short on specific detail.

The NZX needs to have a far clearer market growth strategy, and excellent execution, if it is to meet the objectives of the Capital Market Development Taskforce.

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