Odious market comparisons

By GEOFF BROWN*

There is a lot of confusion and misinformation regarding the performance of the NZ Stock Exchange.

I frequently read articles with misrepresentative analysis, graphs and charts that seem successful in portraying the local market as a poor performer over the past 15 or so years.

These articles typically compare the NZSE with many overseas - and often irrelevant - currencies, and against a variety of indexes. Just recently, I noticed that two financial journalists wrote lengthy articles that contained some quite inaccurate analysis and comparisons of the NZSE.

I feel a responsibility to outline what investors should look for - and why - when trying to get an accurate understanding of how the NZSE is performing. Here are some of the questions that seem to come up most frequently, and our views on how to measure the performance of the local exchange.

What is the best market measure to use in assessing the NZSE's performance?

You should always ensure that the data you look at quotes performance figures as gross - capital returns as well as dividends - not just capital returns.

The rationale for this is quite simple - when buying stocks, you should measure the total return you are getting on your investment.

You should apply the same logic to your stock portfolio as a property investment. You need to measure the performance of your stock by cash dividends, plus capital appreciation, not just the capital return.

New Zealand is a unique marketplace. Our companies have one of the highest dividend yields in the world. We shouldn't exclude this unique characteristic of our market from our performance analysis.

There are many indexes that measure the performance of NZSE stocks. An index is essentially a bundle of stocks that will give you a good benchmark from which to decide how your portfolio has performed. The key is to measure your portfolio against the most relevant index.

The NZSE manages several indexes, including the NZSE-40, which is the most quoted, and the NZSE All Shares Index, which is the most representative of the overall market.

There are other indices produced that monitor the NZ market, the most common being the Morgan Stanley Capital Index (or MSCI), which is based on the top 12 companies in New Zealand.

We would recommend that investors who own a diversified portfolio should look at the NZSE All Share Index as a benchmark, as it gives the best picture of the overall movement of the market. If you just invest in the larger stocks, you should use the NZSE-40.

How well has the New Zealand market performed overall?

Let's take a look at the NZSE All Share Index over the past 3 years and past 10 years: The NZSE All Share Index performs at the top of the table when compared with the performance of other similar-sized countries, which are frequently used by financial journalists.

It also demonstrates the performance of both the NZSE All Share Index against the MSCI.

The more broadly based All Share Index has consistently outperformed the more narrowly constructed MSCI Index, reflecting the strong collective performance of mid-sized companies in the New Zealand market.

How volatile is the NZSE market?

This is a hotly debated issue, and New Zealand seems to get a bad rap over this - unjustifiably so. Volatility is a critical consideration for investors, because it goes to the certainty of return.

The NZSE, like all markets, took a hit in the late 1980s, where 100 per cent returns one year were outstripped the next year by 50 per cent declines.

This type of dramatic market fluctuation is always going to skew analysis of market volatility, and caution needs to be taken when viewing tables that have arbitrary time periods designed to demonstrate just this.

To prove this point, it is interesting to note that since the extremely volatile days of the late 1980s, the NZSE has in fact performed extremely well, delivering lower overall volatility levels compared with most major overseas markets.

How do currency fluctuations affect the overall performance of the NZ sharemarket?

The story wouldn't be complete without referring to currency. Many market commentators like to measure the performance of the NZSE in foreign currencies.

It raises the question why; who really cares how the NZSE is performing in US dollars or rupees, or any currency for that matter?

The key issue really is the return in New Zealand dollars on your investments overseas, compared with your returns from the NZSE, also in New Zealand dollars.

Conclusion.

Investors need to take care when reviewing market commentary, especially that which seems intent on only representing data that will damn New Zealand stocks, and the performance of the New Zealand marketplace in general.

There is no doubt that the NZSE has a role to play in ensuring the continued performance and success of the New Zealand capital market.

We are focused on the future.

The announcement recently of the new Ax market is an example of how the NZSE is working towards increasing the opportunities for all New Zealand companies to gain access to the much needed capital they require to grow, and equally importantly, ensuring that investors have access to a wide range of products.

By doing this, we will ensure we have a viable capital market that reflects the diverse and growing nature of our companies and economy.

For more information on the Ax proposal, visit the NZ Stock Exchange website.

* Geoff Brown is the NZ Stock Exchange relationships manager.