NZX the vanishing market

If there was ever a time the sharemarket should have grown, it has been in the past four years.

The economic boom should have seen an influx of new listings but, as one commentator says, there's been "almost nothing".

At the same time, the gradual stream of companies leaving the market in the past couple of decades has looked in danger of quickening to a torrent. Corporate Australia has ridden into New Zealand on a fresh wave of cash borrowed from a pool of savings this country can only eye enviously.

With the fresh and particularly urgent attack of anxiety that New Zealand's sharemarket and wider economy is in danger of being irrevocably hollowed out to the point of the country becoming an Australian branch office, there is at least a growing consensus that now is the time to make the hard decisions that can turn the situation around.

But it won't be easy, so much has already gone.

Having completed their mop up of New Zealand's major banks by buying the Brits out of the National Bank, Australian interests now control all but one of the listed property entities.

Ports of Auckland, Carter Holt Harvey, Powerco and NGC are among the companies that have left the sharemarket in the past couple of years.

It is now also facing the threat that number two stock Contact will effectively be removed from the board by being folded into majority owner Origin, and that Waste Management will be merged with or taken over, depending on your view, by another Australian firm, Transpacific.

Then to top all that off, a long-time market stalwart, Fletcher Building, this week indicated it was looking at a voluntary move across the Ditch to where it does much of its business anyway.

The corporate migration has seen the sharemarket's capitalisation as a percentage of GDP trend down for the past decade. Having peaked at about 56 per cent in 1993, by 1996 it was 54 per cent and, by 2001, it was 37.57 per cent. Although it has now recovered to 44 per cent, this is largely due to surging share prices rather than any increase in listings.

And that 44 per cent, unfortunately, is low by world standards. In contrast, the Australian Stock Exchange's total market cap is 106 per cent of GDP.

David Skilling, of the New Zealand Institute, says the major downside of such a shrinkage includes the impact on the Government's tax base, the relocation of major strategic decision-making overseas and the loss of the infrastructure that supports the markets themselves.

"Be it equity researchers or lawyers, if the centre of gravity shifts even more in the direction of Australia or further afield, the incentive is for people to exit for larger markets.

"That makes it more difficult for the next generation of New Zealand firms to raise capital for expansion and investment. There are some significant long-term economic risks in addition to the immediate losses."

Meanwhile, fewer large healthy companies mean fewer local investment opportunities and delisting also removes the obligation for companies to disclose all information valuable to stakeholders other than their owners.

"NZX is losing more than it deserves at this point in time and we believe that's more of a function of the convergence of the Australian and New Zealand economies," says ABN Amro analyst James Miller, whose recent research note on the sharemarket operator helped fan the latest concerns over delistings.

"We are becoming a state of Australia and the cost of capital that applies in Australia is less than that in New Zealand and, hence, our companies are attractive takeover targets."

Miller says the fundamental reason Australian companies can borrow far more cheaply than their New Zealand counterparts is Australia's compulsory superannuation regime.

NZX chief executive Mark Weldon agrees. "The savings available for companies to grow out of is just more robust than it is in New Zealand, which has not addressed the savings pool issue. That is in a nutshell, the issue that faces the listed market."

Commentator and Herald columnist Brian Gaynor points out that while New Zealanders' savings in the form of managed funds have made little progress in the past 10 years, rising from about $45 billion to $50 billion, the introduction of compulsory super in Australia has seen funds there zoom from about A$200 billion to A$800 billion ($950 billion) over the same period.

But Gaynor doesn't buy the argument that the successive waves of takeovers of New Zealand's best and biggest companies is a natural consequence of closer economic ties with our cashed-up cousins.

"We have allowed ourselves to be dominated by our next-door neighbours to an extent that I'm not aware of anywhere else."

It is perhaps easy to see the ongoing Australian buy-up of New Zealand's best companies as a kind of economic imperialism, but Miller does not think that is the model either country wants. "What's good for Australia Inc is actually a strong and vibrant New Zealand. They don't want a basket case over here."

Meanwhile, the departure of companies from the sharemarket is only part of the picture.

"The problem is when they are not replaced by new companies coming through," says Miller.

While New Zealand is reputedly one of the most entrepreneurial countries in the world, it remains a country of tiny players. "New Zealand Inc obviously needs organisations of scale."

With size comes the ability to spend more on research and development and the ability of compete in international markets.

Miller believes the only way to get that scale is through capital markets "that efficiently raise capital at the lowest possible cost".

"In my view, it's a bit of a failing in the capital markets that they're not set up in a way that their fundamental purpose is to provide scale to New Zealand corporates so that they can compete on a global basis."

First NZ Capital economist Jason Wong believes firms are not using the sharemarket to raise capital as much as they might and are often finding alternate sources of finance such as private equity, much of which tends to come from overseas.

Overall, Wong has a fairly downbeat opinion of the market's prospects.

"You've got to really stretch the rubber band to get a real positive view on our equity market going forward on a structural basis," he says.

"You can put as positive a spin on it as you want but, at the end of the day, if there's not the companies there that want to raise money on our equity market then no matter how hard NZX try they're almost running on a treadmill."

Wong says Weldon and NZX have done well in improving the market's reputation and operations.

"But it's hard to see what more they could do, even free listings may not do it."

But if anything, the emerging concerns over the thinning out of the sharemarket may help New Zealanders finally realise their comparatively woeful savings record must be addressed.

"There are a number of reasons for New Zealand's poor savings record but the unfavourable tax treatment of managed funds relative to residential property is a big one," says Tower Financial Management chief executive Tony Hildyard.

"As a consequence, the money has gone into the wrong area. For GDP, access to capital and a whole lot of things it would be better if there was a level playing field. To some extent, the tax reforms that are being put in place for Kiwisaver are getting towards that scenario."

While Weldon says Kiwisaver is a good first step towards developing a deep and meaningful savings pool "you will, at some point, need something on top of that and that has to be compulsion, like they have in Australia".

Hildyard points out that New Zealanders don't like to be told how to handle their money - something that was reflected at the polls in recent years with the 1997 referendum on compulsion overwhelmingly defeated.

But Weldon believes there has been a sufficient number of high-profile events for the debate over compulsory savings to be rekindled.

Skilling is hopeful that this time around, with the rash of recent sharemarket departures acting as a wake-up call, progress can be made.

He says Australia introduced its compulsory savings regime in the early 1990s through an agreement between unions, employers and the Government in the context of rising wage demands.

Amid concerns outright pay increases would be inflationary, it was agreed that employers would make contributions to individual savings accounts.

Skilling said that creative, constructive response paid off for Australia and the conditions prevailing at the time were "not dissimilar' to the present climate here. The Government was in a sound fiscal position and, therefore, able to contribute with tax incentives, while employers were facing ongoing pressure for higher wages from workers.

"There's a bit of a window of opportunity if we want to move."

IF THE CAP FITS

* The sharemarket's capitalisation as a percentage of GDP has trended down for the past decade.

* It peaked at about 56 per cent in 1993, by 1996 it was 54 per cent and, by 2001, it was 37.57 per cent.

* It has now recovered to 44 per cent but this is due more to surging share prices rather than any increase in listings.

* In contrast, the Australian Stock Exchange's total market cap is 106 per cent of GDP.

THE TOP 10 BY MARKET CAPITALISATION

April 7, 2006

* Telecom: $11.45 billion.
* Contact Energy: $4.67 billion, majority owned by Origin, could soon be delisted.
* Fletcher Building: $4.40 billion.
* Vector: $2.75 billion.
* Sky TV: $2.54 billion.
* Auckland International Airport: $2.48 billion.
* Sky City: $2.28 billion.
* Fisher & Paykel Healthcare: $2.08 billion.
* The Warehouse: $1.35 billion.
* Fisher & Paykel Appliances: $1.16 billion.

December 31, 2001

* Telecom: $9.3 billion.
* Carter Holt Harvey: $2.96 billion, delisted.
* Contact Energy: $2.30 billion, now majority owned by Origin, could soon be delisted.
* Lion Nathan: $2.20 billion, Japanese-owned, now listed in Australia.
* The Warehouse: $2.01 billion.
* Fisher & Paykel Healthcare: $1.75 billion.
* Independent Newspapers: $1.54 billion, wholly owned by Fairfax.
* Sky Network TV: $1.54 billion, majority owned by News Corp.
* Auckland International Airport: $1.52 billion.
* Sky City: $1.29 billion.

December 31, 1996

* Telecom: $13.64 billion.
* Carter Holt Harvey: $5.5 billion, delisted.
* Brierley Investments: $3.9 billion, now primarily Singapore-based UK hotel owner.
* Fletcher Challenge Paper: $2.15 billion, now owned by Norske Skog.
* Fletcher Challenge Forestry: $1.9 billion, now stripped of trees, trades as Tenon.
* Lion Nathan: $1.86 billion, now Japanese owned and Australian listed.
* Fletcher Challenge Building: $1.61 billion.
* Fletcher Challenge Energy: $1.52 billion, now owned by Anglo Dutch Shell.
* Wilson & Horton: $1.13 billion, now owned by Australia's APN.
* Air New Zealand: $1.06 billion, bailed out by the taxpayer but still listed.