KEY POINTS:
With the benchmark NZSX-50 index ending up below where it began the year, 2007 will not go down as a great 12 months for the local sharemarket.
But the volatility that spilled from the United States credit markets into sharemarkets around the world has at least proved the strength of local market operator New Zealand Exchange's business model under chief executive of four years Mark Weldon.
The services and information NZX provides to its market participant clients and others are now generating more income than it makes from clipping the ticket on trades.
That said, Weldon believes the New Zealand market showed encouraging resistance to the US-generated volatility, which in recent months has now become almost commonplace.
"In a recent session, the Nasdaq was down 1.8 per cent and it wasn't even front page of the Wall Street Journal. Normally it would have been the whole newspaper."
If the US is becoming inured to big market swings, it's probably just as well: "With the sickness in the US housing market and banks and increasing concerns about the US consumer, volatility is going to stay around the US markets and you are going to see more and more of that play through to the Australian market."
Weldon observes that apart from its mining stocks, the Australian market's stellar gains over recent years have been partly fuelled by the rise of several infrastructure investment and other financial engineering firms and it is therefore "quite exposed to the global credit markets compared to us".
"Really, their business model has been cheap money and leverage upon leverage, so when the yield curve starts to get inverted or volatile and they come to refinance things get pretty interesting."
Having said that, the credit crunch did derail listings on NZX's markets over the second half of last year.
"A lot of people shelved their listing plans. We ended up with eight on the main board, four on the AX. That's solid but not spectacular."
Despite 2007 being "a hard year", the positives for NZX included the more than $5 billion raised on its markets. "What's very positive is a lot of that capital's been raised to fund offshore acquisitions by the likes of Fletcher Building, Rakon and Methven."
Weldon sees those overseas investments as important because they go some way to addressing what he believes is a big problem for NZ.
"It's not really a problem, apart from the banking sector, that so much of our economy is overseas owned, what's more of a problem is how little investment is going the other way."
Further to that, Weldon says one of the greatest disappointments over 2007 for him was "the continued politicisation and partisan approach brought to the state-owned-enterprise sector".
"It is unfortunately a bit of a ping pong ball for politics rather than thoughtful policy development.
"To have 15 to 20 per cent of the economy permanently domestically focused creates some real issues for you with the balance of payments, especially on the investment account side. Those are businesses that are not raising capital to go overseas.
"That puts us nationally at a competitive disadvantage."
Meanwhile, Weldon believes 2007 will be remembered among other things as the year the private-equity bubble ended. "Their cost of money has normalised, and their ability to go and buy businesses at stupid values because of really cheap paper [debt] disappeared. They will now revert to being a normal healthy part of the market rather than a distortionary part, so that's very, very positive for the long-term listing outlook."
Higher interest rates as a result of the credit crunch could even see some private-equity players forced to sell up early.
"The longer-term outlook for product coming out of private equity and on to the market is pretty decent."
Overall, Weldon says, one of the most significant developments over 2007 was the KiwiSaver-related change in the national conversation around investment and capital markets.
"It's not now 'is there a savings problem?', it's 'are we on the right track?'. It's not now 'do capital markets matter?', it's 'how can we make them more vibrant and healthy, and provide more value back to the economy?'.
"I think there's been a real change articulated over how people are viewing the markets and institutions, top to bottom."
Looking ahead, one of the main challenges is still "to get tax right".
"Not personal tax, but the technical stuff around imputation credits, resident withholding and not resident withholding that are placing the capital markets here at a disadvantage.
"That's got to be a short-term focus of politicians and the policy makers to protect the tax base and grow the capital markets. You'd also like to see the headline rate for corporates go to 25 per cent.
"If you did those three things you would get a very, very thriving economy in the medium term, a lot more than you you would get from personal cuts."
The work around imputation credits is also likely to prove important as it is probably necessary for any partial NZX float by one of the big Australian banks' local units.
That is looking an increasingly likely prospect given the Australian banks' increasing focus on Asia and their calls for a review of the four-pillars policy which prevents their merger or mutual acquisition.
"The Australian banks are clearly looking more to Asia and at some point in time they're going to want to allocate capital out of a lower-growth market like New Zealand into high-growth markets, that's just sensible.
"If we get the tax situation right, I think there's a real chance that [a partial NZX float] would happen and that would be tremendously positive for New Zealanders to be able to invest in the banks in a tax-efficient way."
A more specific and immediate challenge for NZX itself is the development of its TZ1 carbon trading market.
"The trading and clearing legislation and the infrastructure that we're building will all be in place by the middle of the year."
The market will be 80 per cent forward and 20 per cent spot and if NZX succeeds with the proposal that will pave the way for a broader range of futures products.
"A healthy futures market in New Zealand will drive liquidity more broadly into the underlying instruments, which brings in more investors, lowers the cost of capital and you get a real virtuous circle going."
That would also be very handy should the Fonterra listing proposal proceed. "If Fonterra does list, it needs a transparent milk price.
"If there's a milk price you can build a futures product and if you can build a futures product then the farmers can hedge against the volatility in commodity prices.
"While it's great that dairy prices have been going up, mathematically that's just volatility and supply and demand could change.
"There's a real long-term need for the ability to hedge and the major obligation we've got is to figure out a way that we can provide a hedging mechanism for changes in those prices.
"That will be something to watch over the next couple of years."
Another NZX venture worth watching is the AXE ECN equity trading platform. "That will be pretty exciting to see what market share that business gets off the ASX."
