The New Zealand sharemarket's share of the domestic economy is too low, according to a survey that says the situation threatens the "critical mass" of this country's capital markets.
The study, by Goldman Sachs & Partners New Zealand, said that 15 years ago the equity market's share of gross domestic product was within the range of comparable advanced economies. At 56 per cent, it was not far off Australia's 68 per cent.
But since then its share of GDP had slumped to about 30 per cent, while Australia's had grown to 89 per cent.
"When you look at the other economies that have that sort of level of ownership [30 per cent] - Greece and Ireland are among them - it's simply not a well functioning market at that share of the economy," said Bernard Doyle, a JB Were investment strategist who carried out the survey for Goldman Sachs.
The survey said a "steady leakage" of equity into the unlisted sector, mostly through takeover activity, was not helping the situation.
Doyle gave the example of MediaWorks, which operates TV3 and used to be listed on the NZX before it was bought by Australian private equity firm Ironbridge Capital.
"[The stock market's] declining role in the economy has meant market liquidity has suffered," the survey said.
It said daily trading volumes provided the best illustration of the tenuous state of institutional investing in New Zealand, with average daily turnover remaining flat since the late 1990s at about $80 million a day.
In comparison, daily trading in Australia had surged from $1 billion in 1997 to $5 billion today.
Doyle said increasing the sharemarket's capitalisation to 50 per cent of GDP was a worthwhile goal.
"From my experience, the importance of a sharemarket in an economy is easy to understate - it plays a really important role in growing businesses and helping businesses into new markets," he said.
A number of potential market transactions, including the proposed partial flotation of state-owned enterprises, could help the NZX's capitalisation get to half of GDP, the survey said.
Doyle said a partial listing of the SOEs would increase the market's capitalisation but would not add a lot of diversity.
Investors often asked how they could get exposure to the agricultural sector, he said, which did not have a large presence on the sharemarket.
Doyle said there was still potential for a partial listing of dairy co-op Fonterra.
"Any credible listing from the agricultural sector would be extremely good for our market," he said.
Doyle said a partial listing of Trade Me was also a positive prospect.
Fairfax Media, the online auction website's owner, announced plans late last month to sell 30 to 35 per cent of Trade Me through an initial public offering.
The sale could be worth about $500 million and would be the biggest float New Zealand had seen in years, market commentator Arthur Lim said.
The survey said demand for equities was improving, helped by the "tailwind" given to institutional ownership by KiwiSaver and the NZ Super Fund, as well as solid terms relative to those on the Australian market in the past year.
Foreign ownership of New Zealand's equity market was almost unchanged at 35.9 per cent in the June quarter, compared with 36.1 per cent last year, the survey said.