The combined equity and debt market capitalisation of companies listed on the NZX has doubled over the past 10 years, recently peaking at more than $150b.
This signifies that the growth track of New Zealand's capital markets is strong, and our market continues to perform well relative to international peers. Our listed companies have delivered healthy dividends and share price increases, and as such local investors have received strong returns.
The continued strength of New Zealand's economy, relative to other countries, and the introduction of the Financial Markets Conduct Act (FMCA), which has made it easier for listed companies to raise capital, are positive features of our capital markets.
This has had a particularly significant impact on NZX's debt market, which has doubled in size over the past 18 months. The global popularity of NZX's dairy derivatives market has also been a recent highlight, reinforcing its long-term growth potential.
Trends in New Zealand's equity market
Since 2006, total equity market capitalisation has grown from $65b to more than $126b, a compound annual growth rate of 6.6 per cent. Over the same period the average daily value of equity transactions increased by 23 per cent to more than $175 million.
The last three years have seen an acceleration of this growth, with increases in total market capitalisation of 10 per cent and daily value traded of 11 per cent respectively per annum.
Progress made in New Zealand to create stronger and deeper capital markets is graphically illustrated by the increase in the ratio of equity market capitalisation to Gross Domestic Product, which peaked at 50.1 per cent in July 2016 (see chart on opposite page). This is a significant milestone given the ratio was as low as 25 per cent in February 2009 and by mid-2012 had still only risen to 27.6 per cent.
In addition, our benchmark index, the S&P/NZX 50 Gross Index, reached a new milestone of 7571 points on September 7, 2016. To give that context, the index was at 2715 at the end of 2008 following the Global Financial Crisis (GFC) and had only returned to pre-GFC levels of around 4000 by the end of 2012.
The subsequent five years have delivered exceptional returns, both in absolute terms and relative to international markets.
Bloomberg numbers show the five-year return of the S&P/NZX 50 index to the end of 2016 was 110.1 per cent, which equates to a compound annual growth rate over the same period of 16 per cent a year.
That's a very healthy performance compared with major international market indices, including the Australian S&P/ASX 200 Accumulation Index (annualised return of 6.7 per cent over the same five-year period), the UK FTSE 100 Total Return Index (6.7 per cent), and the USA S&P 500 Total Return Index (17.4 per cent).
The S&P/NZX 50 has continued to outperform international markets in recent times, with the index solidly in positive territory -- up 8.8 per cent for the year to December 31, 2016.
The first quarter of 2017 saw this trend continue -- with the index up 6.6 per cent year to date (see comparison on opposite page).
NZ's appetite for debt
The recent appetite for New Zealand's debt market has been a key feature of market health, with growth driven by the listing of corporate bonds, and structured and hybrid debt securities.
Total debt market capitalisation has grown from $7b in 2006 to more than $25b in 2016, a compound annual growth rate of 13 per cent.
The total number of listed debt securities increased by 20.9 per cent in the first quarter of 2017, and follows 20.2 per cent growth in 2016. This emphasises that the NZDX continues to meet the needs of the market extremely well, while highlighting its attractiveness and accessibility as a capital raising option following the implementation of the FMCA.
Dairy derivatives development
In 2010, NZX launched a range of futures and options dedicated to exported dairy ingredients, and more recently New Zealand dollar liquid milk contracts.
NZX is now home to the fastest growing derivatives market for global dairy ingredients (see graphic opposite).
Last month, overall volume on NZX's dairy derivatives market climbed 268 per cent on the previous corresponding period, and reached a new record for open interest of over 50,000 contracts.
NZX is now home to the fastest-growing derivatives market for global dairy ingredients.
That comes on the back of new highs reached a month earlier when the market experienced its busiest ever first quarter in futures, with total volume traded up 130 per cent on the corresponding period.
The success of this market reflects New Zealand's importance in the global dairy supply chain. Not only does it create new global opportunities, but with the launch of liquid milk contracts it also provides local dairy farmers with the opportunity to better manage their risk, which has a direct effect on the health of New Zealand's economy.
Creating a holistic picture
The trends stated above capture the development and strength of New Zealand's capital markets, while reinforcing NZX's view that it is important to view market health in the context of long term trends across asset classes, not short term selected statistics to suit news cycles.
These statistics help to create a holistic picture of the critical role stock exchanges play in funding growth for listed companies, which in turn creates jobs for the economy and wealth for investors.
This also fuels the growth of investment funds, which are critical to supporting the future superannuation needs of all New Zealanders.
Though global and local economic cycles have provided a tail wind for our markets over recent years, coordinated market development efforts have played a crucial role in allowing them to flourish.
One of the tangible outputs of this was the development of the FMCA. The Government's share offer programme was also a significant contributor. Both initiatives came out of the Capital Markets Development Task Force, which developed a series of recommendations to broaden and deepen our markets ecosystem and benefit the New Zealand economy.
The impact of the Task Force's initiatives are still highly visible today. Their efforts have added to the quality of investment options and products available on our markets, improved liquidity, and most importantly encouraged more people to invest.
As a licensed market operator, NZX serves at the centre of New Zealand's capital markets. The team at NZX have a responsibility to proactively engage with the market to address the needs of our customers, who include investors, companies, market participants, and other industry participants. Educating companies about the benefits of listing is also a key focus for NZX in 2017.
Last week we published an updated NZX Corporate Governance Code, which represents a significant step forward for New Zealand's corporate governance reporting requirements, with the recommendations reflecting internationally accepted practices.
The Code brings together the industry's views to establish a framework around its strong performance corporate governance practices that is intended to better protect the interests of and provide long term value to shareholders, while seeking to reduce the cost of capital for issuers. Its overall aim is to increase confidence and drive greater market participation.
We will soon deliver the outcome of a review of our Participant Rules, which seeks to strike an appropriate balance between enhancing NZX's supervision and surveillance capabilities, and managing the compliance burdens for participants.
Market engagement in both reviews exceeded expectations, reflecting the industry's commitment to and need for effective regulatory infrastructure, and NZX's key leadership role in the markets.
NZX will this year begin the first substantial review of its listing rules since 2003, which will build upon this engagement. Effective listing rules are core to promoting integrity and participation in our markets.
The review will consider the current settings for smaller listed companies and assess our market structure to determine how we might list a wider range of financial products.
NZX is committed to creating a collaborative culture at the core of our markets ecosystem, because we understand our market's success depends on a range of stakeholders, and the architecture of our capital markets must meet the needs of all our customers.