Sleepy hollow sharemarket

By PAUL PANKHURST

Soft, sluggish, or quiet - lethargic, modest or thin. Soggy. Stalled. Sleepy.

In the daily reports on the sharemarket, journalists go through contortions trying to find new ways of saying the same thing: it sure is quiet out there.

For sharebrokers, a day in the life of the market is measured in millions.

"It was a $100 million day."

Or: "It was a $50 million day."

Or: "$37 million today - pretty quiet", as Erin Hutchings, of Direct Broking in Newmarket, said on Tuesday.

To illustrate the point, Hutchings will point to the dearth of deals on the sharemarket ticker running across the top of her computer screen.

One anecdote has it that when a big sharebroking firm tells overseas affiliates of its share of New Zealand trading, it gives a percentage figure but omits the dollar value as too embarrassingly small.

Up on the 13th floor of an Auckland office tower, at sharebroking firm Forsyth Barr Frater Williams, executive director Don Turkington says: "Last year, we had the view that a high volume was $100 million-plus. A high-volume day now is $60-million plus."

The value of shares traded from January to July this year was $9.9 billion - down 37 per cent on the same period last year. The total for 2001 - $23.8 billion - was down 12 per cent on 2000.

Blame the rest of the world.

Share prices in North America and Europe have fallen by nearly 40 per cent from the peaks of March 2000 and Japan's Nikkei index just hit a 19-year low.

Our share prices have not tumbled, but Northern Hemisphere equity funds have pulled back globally and are the biggest factor in the fall in turnover here, according to Stock Exchange chief executive Mark Weldon.

Weldon acknowledges the decline is not good - a deep market works better than a shallow one - but argues against overstating the problem.

It is, he says, a "last few months" type of thing.

"It's not a structural problem that won't improve when the cycle changes."

Turkington points out that in volatile times, the big funds managing billions of dollars concentrate on their biggest holdings, and "peripheral markets like this one are forgotten".

"The interest won't change until world markets start to pick up," he says.

Because sharebroking is a commission business, the falloff puts pressure on firms' revenues and profits.

Chris Stone, a director of the fledgling Wellington-based firm McDouall Stuart, says: "There is no question that profitability in broking is pretty low, if you just isolate out the transactional side."

While the sharebroking business has reconfigured itself over the past two years - mergers, downsizings, closures - more of the same is possible.

Despite the soft market, finance company Challenger International is pressing ahead with plans to launch Challenger First Pacific as a broking and advisory offshoot.

Challenger head John Rowley has no doubt that brokers are struggling - "it's got to be tough" - but says the new venture will offer a range of investment products and advice, rather than just focusing on shares.

If "the cycle" is the big explanation for a quiet market and a shift away from shares, brokers and the Stock Exchange also talk of a range of short-term and long-term factors.

One: an absence of the chunky privatisations of the past.

Another: the market's reputation overseas. At a talk last month, Weldon said two of the world's five largest funds had New Zealand as "banned", believing investors get burned here.

A third: Turkington says most New Zealand stocks are too small to meet the investment criteria of the big global funds - and the few stocks that do have not served investors well. "Our index has never done very much. That is, the NZSE40 capital index has been stuck around the 2000 mark for years. And that's a reflection of the very poor performance of our leading stocks in recent years."

He is talking about the likes of Telecom, Carter Holt Harvey, Air New Zealand, Fletcher Forests, "and Fletcher Building to some extent, although that's recovered in recent times".

A fourth factor: a run of capital notes issues, such as the one on offer from New Zealand Dairy Foods, dragging money away from shares.

At the Stock Exchange, the "to do" list for the newly arrived Weldon includes some measures that could help to lift volume.

Widely publicised and now up for discussion is the exchange's proposal for what it hopes will be a dynamic second board, the AX, or "alternative exchange".

Weldon says the market also needs to develop shorting (selling a share before buying it) and derivatives (hedging instruments such as futures and options).

Those tools allow a wider range of investment strategies.

"If you look at the Australian Stock Exchange, estimates are that 30 to 40 per cent of all trades on the stock market are trades that are paired with futures trades on the SFE (Sydney Futures Exchange). We don't have those types of trades being made." He says New Zealand is also unlike "every other single jurisdiction in the world" in imposing a tax penalty for shorting".

"It's absolutely, completely illogical that it incurs a tax penalty. We're putting together and collecting some industry thoughts on it - it's an issue that's been around for a while - and we need to work with, I would believe, the IRD to get a ruling on it."

Some brokers are hoping the Government's superannuation fund will make a big difference to the market - perhaps as much as $300 million invested a year although some expect a lot less than that.

It's the Stock Exchange's view that, while volumes matter, the "real story" here is something else.

Weldon: "The Dow has fallen from 11,000 to 8000 and our market on a gross return basis has gone up - and I think it's the first time ever in our history. The old saying is, 'When America sneezes, we catch a cold.' Well, this time America caught a cold and we barely sneezed."

He highlights the earnings disclosed in the latest round of results by the likes of Port of Tauranga, Sky City and Fletcher Building, and contrasts those with what's been happening in Australia, Britain and the United States.

"This market has actually performed remarkably well and has actually proven itself to be somewhat independent of the trials and tribulations of the Northern Hemisphere."

That is not, he says, a trivial event - and could lead to a shift in the way the market is perceived.

It's not a bad story for this market to tell - as long as there's someone out there who wants to listen.