Sharemarket needs to perform, conference told

By ADAM GIFFORD

Consistent underperformance of the New Zealand sharemarket has cost New Zealand $600 billion since 1986.

That's wealth that would have been created if the market had performed at the same rate as the United States Standard and Poors 500 market index, according to research by international consulting firm McKinsey and Company.

McKinsey senior partner Richard Foster told the Knowledge Wave conference during that period the corporate and government bond rates were a better alternative to the sharemarket.

He said the United States had similar conditions in the early 1970s.

"There were very few venture capitalists, no innovation, no room for risk capital," Mr Foster said.

"In New Zealand, risk capital is not functioning. Risk capital must function if innovation is to function."

The New Zealand's market is tiny and illiquid. Companies dream of listing on Nasdaq - they should hope to be in the New Zealand top 40."

He said 95 per cent of companies which list in the US are growth stocks, compared with 55 per cent in New Zealand.Mr Foster said McKinsey research on companies in the Fortune 100 and Standard and Poors 500 showed markets always perform better than companies.

It also showed the average life of a company now was about 15 years, compared with 65 in the 1920s.

He said market growth came from companies at the periphery of an industry, rather than the large firms at the core."If you want to see the future, look at the periphery of industries you are dealing with."

He said the role of stock markets is to bring in high performing companies at the beginning of their life, and remove the underperformers at the end in a process of "creative destruction".

An economy "is represented by gales of creative destruction".

He said building proper creative destruction into the New Zealand economy will be hard, with a very small venture capital industry and very few new listings.

"You need to think like the market and transform your institutions to allow the processes of creative destruction to operate.

"Steps include strengthening the performance of current companies, strengthening internal capital markets by creating greaterliquidity, transparency, risk assumption and syndication, investment in physical infrastructure of attract foreign capital, talent and knowledge, and focusing development in the periphery, not on pure science.

"It is the right of no institution to exist perpetually, it must be continually earned," Mr Foster said.

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