Brian Gaynor: NZSE victim of two decades of neglect

The investment performance of the New Zealand Stock Exchange is a hotly debated issue in the financial community. The instinctive reaction is that our sharemarket has performed poorly, but the exchange and its members continually make statements and publish reports that present our market in a favourable light.

Are the exchange and its members correct? Has the NZSE managed to keep pace with the rest of the world, especially with countries that have similar populations and economic structures?

There are three ways to look at the performance of sharemarkets:

* The gross return, which includes dividends as well as any change in the value of the shares. These returns are calculated on the basis that all dividends are reinvested.

* The capital return, which takes into account only changes in the value of the shares.

* Market capitalisation, the total value of a market and the size of its component companies.

Table 1 shows the performance of a number of the world's sharemarkets for the 10 years ended July 31. A 10-year period has been chosen because these figures, which have been compiled by Morgan Stanley Capital International, are readily available.

This period should benefit New Zealand because the NZSE-40 Capital Index was only 1548 on July 31, 1992, well below its September 1987 high of 3969.

Denmark, Finland, Ireland, Norway and Singapore have been chosen as comparisons because they all have similar populations. The first four also have traditional agriculture or forestry-based economies. Japan is also included because it has had one of the worst-performing sharemarkets over the period.

New Zealand brokers usually base their analysis on the first column in Table 1 - gross returns in local currencies - because it shows us in the best light. The NZSE does relatively well in terms of gross returns as it has a high dividend yield. When these large dividends are reinvested and compounded each year, they have a positive impact on the gross figures.

Nevertheless, over the 10-year period all but Japan and Singapore exceeded New Zealand in the gross returns in local currencies category.

There is a big difference between our gross return of 6.6 per cent a year and the world average of 8 per cent. A $10,000 investment in the NZSE on July 31, 1992, would have been worth $18,910 a decade later, whereas a similar investment in the world index would have risen to $21,630.

The NZSE's gross return, on a US dollar basis, lagged further behind the United States and the world average because the NZ dollar fell from 54.53USc to 46.78USc over the 10-year period. But the NZSE did slightly better than a number of other countries' exchanges because their currencies were relatively weaker against the US dollar.

The Finland Stock Exchange has done particularly well since 1992 because of the strong performance of Nokia. The mobile phone manufacturer represents approximately 50 per cent of the Helsinki market's total value.

In capital terms, the NZSE was even further behind the rest of the world, both in terms of the local currencies and when measured in US dollars.

The same results apply if we look at figures over 20, 15 or five-year periods. In the five years ended July 31, the gross return for the NZSE, in local currency terms, was a negative 3.7 per cent compared with a negative 1 per cent for the world average.

All the other countries covered in this analysis, except Norway and Japan, did better than the New Zealand sharemarket over the five-year period.

The most common way to rank sharemarkets is from a capital perspective only and in US dollars. On this basis, the New Zealand exchange lagged well behind the rest of the world - US$10,000 invested on July 31, 1992, was worth only US$10,480 after 10 years whereas a similar investment in the Morgan Stanley Capital World Index would have been worth $16,760.

Capital returns are the best way to measure sharemarket performances because gross returns are based on theory rather than reality. That is because recipients, particularly in New Zealand, do not normally reinvest dividends.

The total value of a sharemarket is also important in determining the contribution it makes to the overall economy. In a free enterprise economy, where the role of Government is limited, a sharemarket plays an important role in allocating resources and raising new equity for the productive sector.

If a sharemarket is small, and the Government plays a limited role in economic development and there is little inward foreign direct investment, an economy can expect consistently low growth rates.

Table 2 shows the total capitalisation of nine markets at May 31. Only domestic companies are included in this analysis and the United States figures are for the New York, Nasdaq and American stock exchanges.

New Zealand has the smallest market capitalisation by a wide margin, both in terms of total value and on a per head basis.

Our market capitalisation growth has also been the lowest of the nine countries since the end of 1985.

On a local currencies basis, which flatters the NZSE compared with the US dollar figures, the market capitalisation of the Dublin stock exchange has grown by 2850 per cent since December 1985. Helsinki is next with 2810 per cent, then Australia on 730 per cent, Oslo 660 per cent, United States 450 per cent, Copenhagen 440 per cent, Singapore 310 per cent, New Zealand 160 per cent and Japan 70 per cent.

The total value of the NZSE is only US$4800 on a per head basis, less than a third of the next-lowest country.

The average size of our listed companies is just US$134 million, much smaller than in the other countries.

One argument used to defend the NZSE is that New Zealand is a primary producer and the main productive units are individually owned rather than collectively owned through the sharemarket.

But surely the opposite is true. We are still dependent on commodity products because we have not developed a strong sharemarket and urban-based commercial sector.

Denmark and Ireland were once heavily dependent on agriculture, but manufactured goods now represent 76 per cent of Denmark's exports, and chemicals and manufactured goods represent 80 per cent of Ireland's.

Finland and Norway were once heavily dependent on forestry, but the former now has Nokia and a number of other large internationally orientated companies and the latter has discovered large offshore oil reserves.

Brokers' claims that the New Zealand sharemarket has performed better than the those in the rest of the world are incorrect. Our sharemarket has been one of the world's worst-performing markets over the past two decades, and no one has really given a damn until Mark Weldon, the new chief executive of the NZSE, arrived on the scene.

Weldon has a huge task ahead because he has to make up for two decades of near neglect at the stock exchange. He also has to convince listed companies to adopt corporate governance standards that will improve their decision making and lobby the Government to encourage non-agriculture enterprises and promote private investment in the productive sector.