Shrinking market a warning, says NZX chief executive

Mark Weldon

The sharemarket's shrinking capitalisation should serve as a wake-up call to policy-makers about the country's economic future, says NZX chief executive Mark Weldon.

Monthly operating data revealed the capitalisation of the sharemarket's main board in September was $62.26 billion, down 5 per cent on a year ago.

At 39 per cent of gross domestic product the sharemarket's share of the economy is at its lowest for two years.

By contrast the ASX's market capitalisation of A$1.2 trillion ($1.36 trillion) represents about 140 per cent of Australia's GDP.

Over the last 12 months the market has been hit by the departure of large companies usually following a takeover by overseas interests.

"We've seen a lot of companies disappear to private equity," said Weldon.

At present the situation may well turn out to be a case of swings and roundabouts.

"Private equity is not a long-term holder of assets, it has to sell and at some point those things do come back to the public markets."

But if the trend towards market departures was to continue, it would negatively affect the capital market's viability, the tax base, and the standard of living.

"You would say to whoever's running the ship, 'Hey guys, let's set a strategy for the country here,' because it's a country issue, it's not just a market issue.

"On a market, the pricing reflects people's beliefs about the future and to that extent it's probably one of the most honest indicators you've got around where the country is going not only in terms of performance but in terms of tax base and wealth creation and what the economy looks like."

Yesterday's data also showed retail investors were shying away from the market.

While the value of turnover was up slightly in September compared with a year ago, the number of transactions fell heavily for the second month running.

Total transactions on the NZSX main board and the number worth less than $50,000 were both down by 22 per cent.

"There's still institutional volume, but retail volume has fallen by a material amount," said Weldon.

He attributed the decline to a number of factors including the slowing housing market.

Far from competing for investment funds, Weldon said, the equity and property markets had a symbiotic relationship.

"Wealth is created on the stock market and it goes into property, and wealth is created in the property market and goes into stocks."

However, rising mortgage interest rates meant more income was going to service home loans at the same time as growth in house prices was slowing, "so there is, we believe, a little less free cash around".

Weldon said retail investors had also been unsettled by "a confluence of events" including the unfavourable regulatory decisions regarding Telecom and Vector, and recent failures of listed carpet firm Feltex and three finance companies.

While the failed finance companies were not listed, their receiverships had contributed to the emergence of a "high degree of risk aversion" among investors.

To some extent that had seen cash flow into debt products listed on the NZDX where the number of total transactions was up 4 per cent and those under 50,000 were up 8 per cent.