Capital Markets: Performing well

New Zealand capital markets are clearly in a good space. But what has surprised you? Photo / iStock

Fran O'Sullivan sat down at UBS New Zealand for a roundtable with Nicholas Ross, Andrew Fredericks and David Lane

Herald: How are you seeing the New Zealand economic environment and the international factors which are affecting the market outlook?

Nicholas Ross: The New Zealand environment is very strong and we are still seeing good growth. We have all been surprised by the near-term impact of the downturn in the dairy sector. That has been counter-balanced by very strong growth in services and tourism. We have this very strong Government and fiscal position which can underwrite strong growth, in Auckland in particular, as the Christchurch rebuild tapers off.

When you look at what is out there, it is astonishing how the NZ economy is performing so well when we have a mixed picture in Australia, which is very heavily dependent on resources and the financial services sector.

Herald: The IMF has warned about the potential for the Brexit vote to negatively impact on capital markets. That's well known. But what about other international factors like the impact of a Trump presidency?

Nicholas Ross: It is really interesting. We put out a piece of research recently which said the presidential election has no significant impact on capital markets. It went back 50 years.

Andrew Fredericks: Same with the Australian election. But elections do affect the timetables for capital market activity. Given the number of political events this year, it makes the timetable challenging.

David Lane: My view is if we get through the UK Brexit, we could have a second half of the year that is extremely active. On China --While everyone has a theory on why it was going to fall apart, the facts are this year it has massively out-performed expectations.

Herald: Staying with China, it has been a concern but you are optimistic. Why?

Nicholas Ross: We are still extremely well placed for growth in the region despite the concerns in China. The Five Year Plan has just come out and the Government has targeted 6.5 per cent growth for the next five years. There is still a phenomenal pool of demand for New Zealand product and they will continue to be large exporters of capital.

Herald: But there are some wrinkles aren't there when it comes to foreign investment In New Zealand -- particularly with the Overseas Investment Office?

Andrew Fredericks: The OIO has been an impediment to investment. It is slow and it is uncertain, if you contrast it to the Foreign Investment Review Board (FIRB) where there is a defined timeframe for making decisions. It is actually very difficult for firms making investments into NZ to get equity and bank financing for an uncertain period.

Nicholas Ross Country Head, New Zealand.

Herald: The underlying demand for good assets and well-run companies is still very evident when you talk to investors. Why is NZ attractive?

Nicholas Ross: I think New Zealand clearly has emerged as a separate asset class from Australia and a very good place to invest. Certainly some of the infrastructure opportunities here keep a lens very much on us. If we look at some of the M&A activity there is certainly a lot of interest from international investors. You don't need to be a rocket scientist to see that we screen very well.

Andrew Fredericks: Additionally, private equity firms have gone through a period of divestment and are now raising funds and starting to look for investments. We've had the Diligent takeover and the Nuplex scheme of arrangement. With a lower exchange rate, USD investors are also looking more favourably at Australia and and NZ.

Herald: There has been a lot of volatility however on markets -- what is driving that?

David Lane: The general view was the NZ market got quite over-valued (for institutional investors) and they found it hard and reduced their weightings. But then in came another wave of overseas buying, whether it was indexed-based buying or thematically buying on yield and the relative attractiveness of New Zealand as a place to invest. There was a huge rally in March and a lot of institutions were underweight. So, a very difficult year for them so far. But if the market is doing its job properly new opportunities will arise be it Tegel or listed media situations. Confidence is coming back in -- we've seen a range of block trades and the deal pipeline open up a little bit in the last four weeks.

Andrew Fredericks Executive Director, Investment Banking.

Nicholas Ross: We have been in a period of unprecedented volatility and a lot of market participants are not used to that environment. Same with clients having their fund managers say we are down 10 per cent or up 5 per cent. The volatility drives the more conservative end of town to companies with good governance and track records. They don't want that volatility but good multiples.

Herald: Just summing up, New Zealand capital markets are clearly in a good space. But what has surprised you?

David Lane: Housing consents at a sustained peak of over 30,000 per year. If you had asked me if that was a reasonable assumption by Fletcher Building five years ago -- I would have said "no".

Andrew Fredericks: If you go back two years ago there was a massive concern that the fall from the peak of the Christchurch rebuild would impact on the NZ economy. But that that has been filled by infrastructure, tourism and net migration.

Nicholas Ross: You don't have to be an investment banker to make this comment -- just walk around Auckland City. You can't drive anywhere in Auckland because it is blocked. The Convention Centre build. Scott Pritchard's Precinct build at the Downtown Centre -- there is so much going on in Auckland and that is before some of the major projects.

David Lane Executive Director, Head of Equities New Zealand.

Herald: Concerns for the future?

Nicholas Ross: Negative interest rates are drawing investors to invest in positive yield countries. But the low rates will start biting into the "man in the street" and the fiscal position of Governments. When your retired mum and dad can't generate enough from their savings then that will need to be subsidised somehow.

Fran O'Sullivan is Head of Business for NZME.