KEY POINTS:
New Zealand's savings problem, which was covered in last week's column, is usually assessed from the perspective of the individual only.
The debate rages back and forth about the level of savings required to have a comfortable retirement, particularly as life expectancies rise.
There is also considerable disagreement about the family home and whether it should be classified as a savings asset.
But the other side of the debate, which is the role savings play in fuelling a country's economic growth, gets little air time in New Zealand. This is unfortunate because long-term savings are the best source of equity for stock exchange listed entities.
When these long-term savings are channelled into listed companies - and other private enterprises - they provide fuel for these organisations to grow, create career opportunities and raise salary and wage levels.
These private sector entities should play the major role in the economic development of a country.
Unfortunately NZX-listed companies don't play a key role in stimulating economic growth, mainly because they are starved of equity because of our poor savings record and addiction to housing.
As the accompanying table shows, only $13.9 billion has been raised through the NZX since 1997 compared with a staggering A$385.7 billion ($474 billion) in Australia. ASX companies are expected to raise more capital than NZX entities but the gap is unacceptably wide.
The imbalance between the NZX and residential property is also a major concern as New Zealanders have borrowed $96 billion to buy houses over the past decade but only $13.9 billion of new equity has been raised through the NZX.
The gap between the NZX companies and housing has widened in recent years as the former have attracted only $5.7 billion of new equity over the past five years, whereas bank mortgage debt has surged by a phenomenal $71.9 billion.
Highly qualified graduates are leaving in droves for Australia because we are not generating enough savings to invest in the engine room of the economy, namely our large companies that have the ability to grow, create exciting careers and pay high wages and salaries.
The Government's Fast Forward initiative, which will invest $700 million in industry over the next 10 to 15 years, isn't a solution to our underinvestment problem, particularly when one looks at what has been happening on the ASX.
The two main sources of stock exchange capital raisings are Initial Public Offerings (IPOs) and additional capital raisings, mainly rights issues and placements.
There were 392 IPOs on the NZX between January 1982 and December 2007 compared with 3051 on the ASX.
But the most important point is that 52.3 per cent of New Zealand's IPOs were in the five years before the 1987 crash with only 10.2 per cent in the past five years. By comparison the ASX had 24.4 per cent of its IPOs in the five years prior to the 1987 crash and 34.8 per cent in the past five years.
IPOs attract new investors to the sharemarket. This was clearly evident in the mid-1980s when the NZX had 50 IPOs in 1986, 65 the following year and a major stockbroker expanded its client list from just 3,500 to 23,000.
The NZX has never fully recovered from the crash for a combination of reasons including the unwillingness of successive governments to recognise the importance of promoting investor confidence through better regulation, the removal of tax incentives on superannuation by Finance Minister Roger Douglas and the woeful governance of the NZX throughout the 1990s.
The NZX had only 85 IPOs in the ten years ended December 2007, compared with 1547 on the ASX, and not many of these NZX IPOs raised significant new capital.
The NZX's three best IPO years, in dollar terms, were 1998, 1999 and 2004.
In 1998 most of the IPO capital raised was through Ameritech New Zealand Investments and Auckland International Airport, with funds raised by the former going to the American majority owners of Telecom and for the latter to the Government.
The main IPO in 1999 was Contact Energy, with the money also going to the Government, and the biggest raising in 2004 was a $350 million ASB Bank preference share issue. There were 17 IPOs in 2004 but most of these raised little new capital.
It is difficult to identify any large IPO in New Zealand in recent years where the funds raised were invested in growing the company rather than going to the vendors.
Australia has had a huge number of IPOs in recent years. Some of the money raised went to vendors but the vast majority was invested in the newly listed companies.
The other major form of capital raisings is additional equity, mainly rights issues and placements. The ASX has completely overwhelmed the NZX in this area as it has raised A$269.8 billion over the past decade compared with just $5.8 billion through the NZX.
There is a huge pool of savings in Australia and listed ASX companies tap this resource to raise money to grow their organisations.
In the past two years ASX companies have raised a staggering A$143.9 billion of equity through IPOs and additional sources while NZX companies have raised a paltry $2.4 billion.
The biggest rights issues in New Zealand in recent years have been Pike River Coal and New Zealand Oil & Gas, through the exercise of its options. Most of the other rights issues have been small.
The lack of savings, and equity capital to invest in our productive companies, has a number of negative implications for the New Zealand economy.
Companies are more reliant on debt, which is often difficult to obtain and expensive. As bank lenders are conservative and risk-averse, the borrowers must adopt the same characteristics.
A risk-averse business sector does not make a material contribution to a country's economic growth.
In addition, companies in a savings and capital deficient country are more likely to be taken over by companies from a country that has substantial savings and an abundance of capital.
In light of this, it is not surprising that a huge number of our major companies have been acquired by Australian interests.
This trend will continue until there is a substantial increase in New Zealand's savings rate and individuals are willing to invest more funds in financial assets, particularly equity.
One of the features of Australia and New Zealand is that they were remarkably close in terms of per capita GDP until quite recently.
In 1975 Australia was 9th and New Zealand 10th amongst the 30 OECD countries. By 1990 Australia had slipped to 10th and New Zealand 15th but since then our transtasman neighbours have recovered to 8th while we have slipped to 19th.
Australia's high savings rate and substantial equity investment in the productive sector, and our poor savings rate and minimal equity investment, have been major contributors to the widening gap between the two countries.
It is also one of the main reasons why so many New Zealanders are leaving for higher paying jobs across the Tasman.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
