Jim McElwain: Markets ready for the renaissance

Bill English speaking at the launch of pre-registration for the Government's share offer in Mighty River Power. Photo / NZH

We need to ensure new policy does not undo the good work that has been done

Capital markets do matter - when working well, they mobilise pools of savings and direct them to businesses that will produce the best return for the economy.

The Building Capital Markets report, published by the Government as part of the Business Growth Agenda, identified that $160 billion to $200 billion of new investment is required here to finance a targeted increase in the export sector from 30 per cent to 40 per cent of the economy by 2025. A well-functioning capital market would play a crucial role in facilitating this process.

The New Zealand sharemarket capitalisation is now around 30 per cent of GDP - half that of the mid-90s and around a third compared to Australia. However, there are reasons for optimism that our equity capital markets will experience a renaissance.

The conditions have been laid for increased confidence in our markets. We now have a more robust regulatory regime, shortly to be capped off with the passage of the Financial Markets Conduct Bill. But politicians and policymakers must stay vigilant to avoid adverse unintended consequences from proposed legislation that could reduce investment in the productive sector.

The financial sector has seen much positive reform recently including the formation of the Financial Markets Authority (FMA). A new regulatory regime has been introduced for "non-bank deposit takers" (the former "finance" companies) which are now overseen by the Reserve Bank.

The Financial Markets Conduct Bill when enacted by the end of June should lead to enhanced outcomes for investors and lower cost capital raisings for smaller businesses. However, care needs to be taken that unintended consequences of proposed legislation or regulations do not reduce incentives to invest in productive enterprises and undo all the good work of late. Let me outline two examples.

The first example is the proposed criminalisation of director duties under the Companies and Limited Partnerships Bill. Infinz and other leading organisations and businesses are concerned these provisions in the bill, as currently drafted, would adversely impact on legitimate business risk-taking and attracting director talent.

The second example is the recent proposal to introduce a single-seller purchaser in the electricity market. Infinz notes the sharp and material reduction in the market value of a number of listed energy companies following this announcement. Where such proposals appear out of the blue, without wide consultation, investor confidence can be shaken. An increased risk premium might apply to shares in these and other utilities - and the New Zealand capital market in general - leading to higher returns being sought, driving up the cost of capital.

KiwiSaver is a very positive dynamic for the market. One estimate, by ANZ's OnePath, is that KiwiSaver funds under management could amount to as much as $50 billion by 2021, some four times the current level. Aside from the direct inflows into these schemes, a consequential benefit is the increased interest in the capital markets and growth in financial literacy. The contribution of these funds to finance growing Kiwi companies would be enhanced if a life-cycle investment approach was adopted for the default schemes, whereby a greater level of investment would be made in growth assets such as shares.

In the six months to March 31 2013, about $3.2 billion in equity capital raisings have been conducted on the NZX. This included the selldown of News Corp's investment in SkyTV - the total parcel size of over $800 million is of a scale that hasn't been seen in the NZ market for 10 years. And the $525 million listing of Fonterra Shareholders' Fund units provides investors with a new sector in which to invest.

There are presently record levels of cash held by depositors with the trading banks in New Zealand - in excess of $100 billion. The key to increasing investment in the sharemarket is to expand investment opportunities available to investors. That is where Mighty River Power comes in.

Some 440,000 have pre-registered for Mighty River Power, which signals widespread interest in considering this as a possible investment option. The float of Mighty River is expected by most commentators to attract the interest of many retail investors. Even if an investment is not made, the increased focus and exposure to share investments is a positive.

Retail investors are important supporters of the capital raisings by smaller, growth, businesses. Examples of recent actual or mooted listings by smaller companies include; Snakk Media, the Mad Butcher and SLI Systems. The $117 million raised by Xero in 2012 belies the perception in some quarters that growth businesses cannot raise capital through the share market.

The float of Mighty River is expected to be the largest share offering here since Contact Energy in 1999.

The full implementation of the MOM has the potential to expand the aggregate capitalisation of companies listed on the NZX by 10 per cent which, if achieved, would provide a key momentum shift toward the sharemarket making a full contribution to the economy.

About Infinz

Infinz is the leading industry body for capital markets professionals in New Zealand. It has a membership of over 700 individuals drawn from across the capital markets and includes treasury professionals, investment analysts, fund managers, bankers, lawyers and students. infinz.com

• Jim McElwain is executive director of the Institute of Finance Professionals NZ Inc. (Infinz)