Brian Gaynor: Small but far from perfectly formed

Not surprisingly, given the huge investment deficit, we are poor savers and big borrowers.

The managed funds and mortgage debt figures in the accompanying table show that our borrowings are rising more rapidly than our investments and, unlike the Australians, we have far more debt than managed funds' assets.

In the past two years, the total amount of managed funds has risen by A$224.5 billion ($242.9 billion) in Australia and mortgage debt has increased by A$182.4 billion.

In sharp contrast, our managed funds' assets have risen by a miserly $12.2 billion and our mortgage debt has grown by $30.2 billion.

Another key difference between Australia and New Zealand is the percentage of managed funds invested in the domestic sharemarket.

Australian investors allocate 38 per cent of their managed funds to domestic equities and unit trusts, whereas New Zealand investors allocate only 14 per cent to these asset classes.

New Zealanders have more invested overseas and in interest- bearing securities than domestic equities.

Finally, the last two sets of figures in the accompanying table are the total value of the ASX and NZX and the number of listed domestic equities on each market.

The ASX is huge compared with the NZX in absolute and relative terms. At the end of last month, the NZX had a total value of $62.7 billion or 42 per cent of New Zealand's GDP. The Australian sharemarket had a total value of A$1.05 trillion. Or 116 per cent of Australia's GDP.

Back in the 1980s, the total value of the NZX represented 80 per cent of New Zealand's GDP.

The NZX is not only small but it is 48 per cent overseas-owned, the highest in the world.

The next highest is Australia, which is 40 per cent overseas-owned.

If we take these figures into account, the Australian ownership of the ASX is A$31,000 per capita and the New Zealand ownership of the NZX is a miserly $8000 for every one of 4.1 million inhabitants.

By comparison, Australians have, on average, A$34,300 of residential mortgage debt and each New Zealander has A$28,300 of mortgage borrowings. There are a number of reasons for our low level of investment and participation in the NZX including:

* Property is the preferred asset of most New Zealanders by a wide margin and financial institutions reinforce this by aggressively lending on residential housing.
* There are major tax advantages to investing in property through loss- attributing qualifying companies (LAQC). In effect, interest costs can be deducted from investors' income yet capital gains on property are non-taxable.
* Most New Zealanders identify property investment as ownership yet equity investment is seen as the purchase of shares rather than the part ownership of a company. The inability to link share purchases with ownership has been a major deterrent to equity investment.
* The NZX and the broking community have failed to establish an effective long-term education programme to convince individuals of the benefits of equity ownership.

The most disturbing feature is that the NZX is not attracting investors under 40, as they are much more interested in the leverage and tax advantages of property investment.

The average age of those attending annual meetings seems to be getting older and major investment firms confirm that the under-40s are much more interested in property than shares.

Because of this, we are borrowing more and more overseas to buy residential property and this is an important contributor to the huge current account deficit.

In addition, a high percentage of our major companies have been taken over by overseas interests and 48 per cent of the NZX is overseas-owned, including 74 per cent of the NZX's largest company Telecom.

These figures reflect the absence of an equity ownership culture and are major contributors to the current account deficit in the form of dividend outflows.

Young investors are not interested in the NZX because it is failing to attract new and interesting listings.

In the past 12 months, the total number of ASX listings has risen by 145 to 1631 whereas the NZX has had a net reduction of three companies to 158.

Since the middle of last year at least four New Zealand companies - BrainZ, Endace, Living Cell Technologies and Neuren - have listed on overseas sharemarkets.

Arguably they have much higher market values on these exchanges than they would have on the NZX because individuals in other countries are more willing to invest in relatively high-risk companies.

It is difficult to know if the NZX is small and cannot attract new listings because investors are not interested or whether investors are not interested because the NZX is too small.

Whatever the reason, the over- reliance on overseas debt-funded property investments has to be reversed because it is making a significant contribution to the current account deficit.

The lack of enthusiasm for equities means that a high percentage of our corporate sector is foreign-owned and this also contributes to the current account deficit.

A total reliance on Reserve Bank monetary policy to dampen our enthusiasm for residential property is hopelessly ill advised because it pushes up interest rates and the New Zealand dollar.

This also has a negative impact on the current account because it makes exporting more difficult.


* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.