The NZX is doing its bit to develop the country's capital markets, and lead an exchange focused on growth and value creation, writes Hamish Macdonald.

The benchmark New Zealand index, the S&P/NZX 50 (Gross), broke the 10,000 milestone on 22 April 2019 — signalling strong investor confidence in the local market. That sees the local market up 277 per cent over the past decade, which equates to an annual return over that period of 14.2 per cent (including both dividends and capital growth).

NZX's Q1 2019 markets performance saw it continue to outperform global peers with the S&P/NZX 50 Gross and Capital indices up 11.7 per cent and 10.5 per cent, respectively, recovering the losses observed in the prior quarter. Overall these indices have returned an increase of 5.5 per cent and 3.7 per cent in the six months to 31 March 2019. Comparatively over the same period the S&P 500 declined by 2 per cent (Gross) and 3 per cent (Capital) and the FTSE 100 declined 2.8 per cent and S&P/ASX 200 showed modest increases of 2.3 per cent (Gross) and 0.1 per cent (Capital).

Supporting our goal of being a listing and capital raising centre

While new equity listings remain subdued, NZX's markets continue to be used effectively to raise additional capital by a diverse range of issuers.

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There were 27 retail debt issues in 2018, totalling $6.3 billion issued. A number of companies listed debt for the first time, including NZX, and there were two private companies joining the debt public markets, WEL Networks Limited and Christchurch International Airport. This highlights that the NZX debt market can be used by a range of companies, including for infrastructure funding, smaller capital raisings and as an alternative to bank debt.

NZX's focus during 2018 was on removing blockages to growth and supporting long term market development to attract new product and increased investor participation to our market. This is complimented by our 2019 efforts, which are sales- and marketing-led, as we lift market participation through increased engagement with our current customers and chase new ones.

This renewed focus has largely been made possible by the recent completion of the first holistic review of our market's structure and rule set in 15 years.

The refreshed structure has a focus on market development, particularly in the areas of debt and funds. It includes the launch of a wholesale debt market which has already seen the listing of five wholesale bonds totalling $1.5b this year. There have been two further green bonds listed this year, from Contact Energy and Argosy Property, to complement the green bond listings from Auckland Council and Contact Energy last year.

The introduction of a bespoke set of fund rules will significantly reduce the cost of listing for these issuers and we see a strong market development opportunity in this space.

A listed funds market has the potential to offer investors access to a broader range of asset classes.

There are currently listed commercial property funds, together with local and globally focused exchange-traded funds (ETFs). This could be extended to include access to private equity, infrastructure, early stage companies and other asset classes. This allows the listed market to provide capital to these asset classes in a way that diversifies the risk for investors.

Smartshares, New Zealand's only ETF provider, has also announced its intention to team up with BlackRock to offer eight new ETFs next month. These funds will mean New Zealanders can invest in environmentally and socially responsible global equities and megatrends for the first time.

We have also introduced changes to make further capital raising more efficient, which will continue the momentum we are already seeing, with $3b of capital raised on our equity and debt markets in Q1 this year.

Making the rules more user-friendly and seeking to reduce compliance costs is also a focus, while enhancing investor protections in key areas to promote participation. To support these changes we have also reviewed our fee structure to introduce attractive settings for smaller issuers, and new product classes of wholesale debt and funds.

Salt Funds Management's Carbon Fund and PaySauce joined the NZX Main Board in Q4 2018. We are focused on continuing to build the listing pipeline with a number of companies indicating an intention to come to market this year or next, including Napier Port and Cannasouth. We are excited to welcome these new customers and support their growth aspirations.

This is achieved by putting our customer first...

NZX is focused on continuing to build its service offering for listed issuers, with a dedicated issuer relationship team working closely with customers to understand how we can support their growth. We have been hosting a number of investor retail events throughout New Zealand in the past 18 months, which have given our listed customers a platform to engage with potential investors and build interest in their stocks.

Increasing investor participation is a critical element to growth in our market. Hobson Wealth Partners has joined as a cash market participant and the prospect pipeline for participants is the strongest it has been in several years, as we target more additions. Sharesies and Tiger Brokers (NZ) have indicated an intention to join as trading and clearing participants later this year.

BNP Paribas also joined our market as a depository participant and we are working hard alongside our new participant to onboard their customers in the first half of 2019. There is strong interest from a number of other global depository participants so we are excited at the potential this will unlock for our markets.

… And unlocking further liquidity to drive great participation

In October 2018, NZX introduced several initiatives to increase on-market liquidity and price transparency by significantly lowering pricing and introducing policy changes to ensure brokers are incentivised to place orders on-market, rather than look for another of their clients to trade against.

NZX's goal is to see an overall lowering of costs passed on to investors and attract increased investor participation in our markets. This has resulted in a decrease in the average on-market trade size of 31 per cent, illustrating the movement of volume from large off-screen transactions to on the screen — increasing the accessibility of the market for all investors.

These market development initiatives have delivered record on-market liquidity levels, with on-market activity increasing from 40 per cent in early 2017 to just over 53 per cent in 2018. This compares to 22 per cent on-market value traded 10 years ago, and 29 per cent five years ago. NZX continues to monitor the impact of these measures to consider further refinements.

We have also observed increased usage of S&P/NZX Indices through passively managed investments, an important contributor in driving greater investment flows. Together with our strategic indices partner S&P Dow Jones Indices, we are investigating the launch of new innovative indices in the areas of geographic revenue and environmental, social and governance (ESG). This will provide the market with additional insights and options for portfolio creation and benchmarking.

We are focused on advocating for the market

We are now focused on building and converting the customer pipelines and promoting the listed market, and considering external market and policy settings.

NZX is engaged on a number of public policy initiatives including the Treasury's review of the Overseas Investment Act settings. We think there are strong grounds to differentiate the treatment of companies incorporated in New Zealand who are listed on NZX because these companies are fundamentally New Zealand companies, with strong physical, regulatory and economic connections to New Zealand.

Capital Markets 2029 will also build on efforts undertaken by NZX in 2018 to foster market development. This initiative brings participants of the ecosystem together to deliver a 10-year growth agenda for New Zealand's capital markets.

We are looking forward to continuing to work with all participants in New Zealand's capital markets to capture the opportunities that lie ahead, and deliver a vibrant public market.

● Hamish Macdonald is general counsel and company secretary for the NZX.