Liam Dann: Trust necessary for a grown-up economy

New zealand needs stronger capital markets if it is outgrow its economic reliance on agriculture and tourism. We all know that. In fact we've known it for years.

But doing something about it has proved to be extremely difficult.

It is about as basic as economics gets to say that if you don't have either a good supply or a good demand then you have some serious problems.

Unfortunately that has been the story with the local capital markets for many years.

The supply side of the equation refers to the depth and range of the companies and financial products that are available for local investors.

In other words, places to put some money that will generate a good return.

A common complaint among New Zealand investors is that there is a lack of good local companies in which to invest - there is a lack of depth on the NZX.

NZX chief executive Mark Weldon and his team work tirelessly and admirably to promote the exchange and make the most of what they have got. But it can be a thankless task in the face of the prevailing market trend.

In the past decade many of the nation's biggest and most promising listed companies have disappeared - Fletcher Energy, Montana, Carter Holt Harvey to name a few.

Meanwhile there has been little of similar scale floating on market to address the balance.

Just three companies - Fletcher Building, Telecom and Contact now account for 35 per cent of the NZX-50 index.

Ironically, or perhaps just sadly, this lack of depth hasn't necessarily meant the supply and demand equation is wildly out of sync.

That's because New Zealand also struggles on the demand side. It is not as if there are enormous volumes of capital looking for a home on stock market.

New Zealand investors have preferred to put their money in property - or (tragically in many cases) into finance companies funding property development.

Locally, not enough of the public have had the confidence in markets to invest either directly or indirectly via managed funds.

The damage done to investor confidence in the wake of the 1987 crash is often cited as a major cause of this mistrust.

In reality New Zealand has never had a strong culture of public investment in stockmarkets.

Through much of the 20th century a culture of liberal socialism prevailed and the people trusted in the Government to look after them from cradle to grave.

When the culture finally changed - in the glossy days of the mid-1980s - many investors were wiped out by a combination of the 1987 crash, some sharp practitioners and some poor market regulation.

That did terrible long-term damage to the nation's investment psyche, turning many away from shares for good.

So we have a chicken and egg problem that will take some clever Government policy making to crack.

It could be that with this current regime we are on the cusp of that.

There are some big fix solutions that many in the financial sector would love to see Government action on.

On the supply side, the partial sale of state assets would go a long way to boosting the depth of the market.

The big state-owned power companies, and as Bill English alluded to recently, Kiwibank, could benefit from the extra capital and increased focus on expansion that a market listing would bring.

John Key ruled out asset sales for the first term in power and has indicated that any moves to change that in a second term would have to be part of a policy National campaigns on. The time of truth is drawing near on that issue.

On the demand side, one Government move many would love to see is the introduction of compulsory superannuation. That would provide a major shot in the arm to local markets.

In Australia, where compulsory super has been law for 18 years, there is now A$1.3 trillion invested, and that figure grows at more than A$100 billion a year.

That fix has been ruled out more definitely by the Government - for the time being at least.

Still, if public confidence can be restored by overhauling and strengthening regulation, then there is every reason to believe KiwiSaver and the funds management sector can continue to grow at a good pace.

The collapse of the finance company sector and the Budget's property tax changes should also steer investors in a more productive direction.

With Commerce Minister Simon Power on the verge of giving us some detail about the proposed regulatory overhaul, there is every reason for believers in strong capital markets to be positive.

As Rob Cameron and his team on the Capital Markets Taskforce identified in their report - investor confidence must come first. That is the foundation. Here's hoping it is also a circuit-breaker.