Brian Gaynor: The biggest day we had... and its lessons

New Zealand's KZ7. File Photo / NZ Herald

In '86 we had America's Cup fever and a share boom, now we've got neither.

New Zealand, particularly the sharemarket, was in a totally different mindset 24 years ago this week.

The first few days of November 1986 were the height of the 1980s boom as New Zealanders were captivated by the sharemarket and economic optimism was unbounded.

The late Sir Ron Trotter wrote: "New Zealanders have the drive, innovation and the entrepreneurial flair to score gold medals in business as well as sport. The sharemarket is showing more confidence than it has for years that they will succeed."

It was a beautiful spring day as stockbrokers drove to work on Friday, November 7, 1986, and the forecast was for a brilliant weekend. Most of us felt a combination of euphoria, exhaustion and fear.

We were euphoric because the Barclays Index had risen 98.4 per cent since the beginning of the year and most investors were far wealthier than they had been ten months earlier.

We were exhausted because the phones never stopped ringing and broker offices were drowning in a sea of paper as investors bought and sold shares on a daily basis and share registries couldn't keep up.

We were fearful because many listed companies, particularly in the investment and property sectors, were hopelessly overvalued and first-time investors had no idea of the risks they were taking.

Most brokers arrived in their office before 7.30am to try to sort out the huge scrip problems and take the first early morning calls from frantic investors.

These were often Air New Zealand pilots phoning on arrival in Los Angles to find out how the market had closed the previous day and to place orders for the day ahead.

There was no internet in those days, and brokers were the main source of share price information.

Friday, November 7 looked like being a ripper because the market had been building to a crescendo throughout the week.

On Monday, November 3, it surged 1.5 per cent and later that day the country came to a standstill as Chris Dickson's KZ7 beat Dennis Connor's Stars and Stripes in the first live TV broadcast from the America's Cup in Fremantle.

New Zealand had a severe dose of sharemarket and America's Cup fever.

On Tuesday, the NZX rose a further 1.5 per cent and KZ7 beat Eagle. On Wednesday, the market climbed 0.6 per cent and French Kiss succumbed to KZ7; on Thursday the NZX surged a further 1.8 per cent and Dickson and his crew trumped Azzurra.

Three IPOs - Enzed, Paladin and Prorata - closed oversubscribed during the week and a further seventeen new issues had been announced or were to list before the end of the year.

There was eager anticipation of the listing of Judge Corporation the following week, with investors paying $9 for the company's shares on the grey market compared with the issue price of $3.

But the biggest event of the week was Fletcher Challenge's $1.6 billion bid for NZ Forest Products on Thursday.

This knocked KZ7 off the top news spot and set the scene for Friday, November 7, which was arguably the biggest day in the NZX's history.

Trading was hectic from the opening bell. Floor operators shouted and screamed at each other as investors looked on from the packed public galleries and TV cameras captured the frantic scenes for the evening news.

Quotes were posted on nearly every company, both big and small, and investors seemed to be willing to pay any price for stock.

Buying interest was phenomenal even though call rates were 18 per cent, 90 day commercial rates 17.5 per cent and the 5-year Government bond rate closed at 16.23 per cent.

Brierley Investments climbed 23 cents to $7.30 and finished strongly with no shares on offer. It was the largest listed company, with a market capitalisation of $5.4 billion.

Michael Fay's Capital Markets closed at $7.45, up $1.75 for the week, as investors became more and more enthralled by KZ7's success in Freemantle.

The company had a sharemarket value of $924 million yet it had earnings of only $1.1 million and had never paid a dividend.

Chase Corporation finished at $8.40 after it announced it owned 95 per cent of Farmers Trading and its chief executive Colin Reynolds was selected as New Zealand's best chief executive the previous night. Chase had a market value of $2.7 billion, a price/earnings ratio of 53 and a dividend yield of 0.8 per cent.

Allan Hawkins' Equiticorp closed at a record high of $5.90 even though major shareholdings in ACI and BHP had overstretched the company and Feltex, which Equiticorp controlled, was having difficulties with its bid for Email in Australia.

Other companies that reached new highs that week were Alan Gibbs' Ceramco at $13.25, Rod Petricevic's Euro-National $4.80, Olly Newland's Landmark $2.40, Lloyd Morrison's Omnicorp $3.15, David Phillips' Pacer $9.98, David Henderson's Richmond $3.25, Craig Heatley's Rainbow Corporation $10 and Mark Wyborn's Unity Group $7.90.

Robt Jones Investments was another buoyant stock having soared from $5.98 on October 15 to $15.10 on November 7.

The proposed merger between Wilson Neil and Saudi Corp, which was announced on November 5, was also greeted with great enthusiasm. Wilson Neil rose $6 to $14.50, during the week and Saudi $3.90 to $9.60.

None of the New Zealand companies mentioned in the last few paragraphs have survived in their original form, and many of them have gone bust.

Shares in 275 listed companies were traded during the day. There have been bigger days on the market since, but these have usually been associated with corporate activity or overseas buying interest. There was no takeover activity or overseas buyers on November 7, and there has not been as many companies traded on any one day since then.

The Barclays capital index soared a further 3.2 per cent to 3893 on November 7. That index, which is still compiled by the NZX but is not widely available, closed at 2109 this Thursday.

On that historic day 24 years ago, the total value of the NZ sharemarket rose $1.25 billion to $39 billion.

A few days ago, at the end of October, the NZX's capitalisation was $55.4 billion.

The bars and restaurants of Auckland were full to the rafters that evening and champagne stocks were given a hammering. Little did the revellers realise that we had just experienced the best as far as the NZX was concerned, and that 20 years later investors would be much more interested in residential property than the domestic sharemarket.

A sharemarket needs two basic ingredients to attract widespread investor interest - a good regulatory regime and growth, particularly new listings.

In the 1980s there was plenty of growth but poor regulation. Most of the reports after the 1987 crash recommended better regulation but successive governments refused to accept this advice.

The Government is addressing the regulation issues but where is the growth going to come from? New Zealand investors and business people have become so turned off by the sharemarket that there are almost no new listings.

The domestic sharemarket won't recover until the growth side of the equation is addressed. This is why the NZX desperately needs the Government to sell minority stakes in its commercial companies through stock exchange listings.

But the Government also needs to be more innovative as far as private companies are concerned.

A reduction in the corporate tax rate for the first five years that a company is listed on the NZX would be a powerful incentive to encourage more listings.

* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com