By Brian Gaynor
Investment
What is wrong with the New Zealand sharemarket?
The expanding economy and positive outlook for company profitability were expected to give the market a strong start to the new millennium. The relative cheapness of shares, on an international comparative basis, was also seen as a positive factor.
Early optimism has been dashed and in the first six weeks of 2000 the NZSE40 Index has fallen 7.5 per cent while the Australian All Ordinaries has risen 0.5 per cent.
The New Zealand sharemarket cannot shake off the malaise that afflicted it throughout most of the 1990s.
To understand why the new year has started on a disappointing note we have to look at the two big components influencing share prices. The fundamental factors are economic growth and company profitability and the other key influence is supply and demand.
The underlying outlook for the market is extremely positive. Most Western economies are experiencing strong economic growth, the Asian region is recovering and the Australian economy, our largest export destination, continues to expand.
Commodity markets are also improving, the America's Cup is benefiting tourism, farmers are experiencing a good growing season and unemployment is falling.
Not everything is positive - the current account deficit remains a major problem - but the plus factors outweigh the negatives and most economists are predicting a strong economy over the next two years.
The New Zealand Institute of Economic Research is forecasting GDP growth of 3.2 per cent in the March 2000 year to be followed by 4.2 per cent in 2000/01 and 3.9 per cent in 2001/02.
The expanding economy is having a positive impact on company profitability.
Business opinion surveys, and recent results from Tranz Rail and Carter Holt Harvey, indicate that the final results for the 1999/00 year will be at the upper end of expectations. If the economy continues to expand then earnings will grow again in 2000/01, dividends will increase and price/earnings multiples decline.
The sharemarket should thrive under these conditions but the favourable fundamental outlook is outweighed by the negative supply and demand variables.
Two of the big characteristics of the sharemarket are the high level of foreign ownership and low participation by local individuals.
Surveys by brokers Deutsche Securities reveal that overseas ownership of the market rose from 19 per cent in December 1989 to a high of 61 per cent in August 1997.
The latest survey, completed in July 1998, showed that overseas ownership had declined to 57 per cent. Offshore institutions owned 36 per cent of the market and overseas companies 21 per cent.
By comparison, overseas interests owned 41 per cent of the Australian sharemarket as at September 30 last year.
Offshore institutions have become net sellers of New Zealand shares for several reasons. These include the consistently poor performance of the economy and sharemarket, the large current account deficit and weak currency, more attractive investment opportunities in Asia and uncertainty over the new Labour-led Government.
This overseas selling is having a depressing impact on the market because New Zealand investors have lost confidence in their sharemarket and prefer to allocate a greater proportion of their investments offshore.
Managed funds statistics highlight the different attitude towards investment on either side of the Tasman. These are:
* Between June 1996 and September 1999 total managed funds increased by $A192.7 billion ($247.5 billion) in Australia but just $7.8 billion in New Zealand.
* In the same period the amount of managed funds invested in domestic equities rose by $A57.8 billion in Australia but only $0.8 billion in New Zealand.
* In Australia 29 per cent of managed funds are invested in domestic equities and 19 per cent offshore while in this country 17 per cent of funds are invested in the sharemarket and 33 per cent overseas.
* At the end of last September, the domestic equities portion of managed funds represented 27 per cent of the Australian sharemarket's total value while in New Zealand the corresponding figure was only 14 per cent.
These statistics are reflected in the relative performance of the two sharemarkets. In the 39 months up to the end of last September, the Australian All Ordinaries Index rose 25.8 per cent while the NZSE40 Index fell 9 per cent.
Compulsory superannuation has given a major boost to the Australian fund management industry and the strong bias of these funds towards domestic equities has had a positive impact on the Australian sharemarket.
A survey released this week by the Australian Stock Exchange, which received front-page headlines in many newspapers, also confirmed that more Australians than New Zealanders were investing directly in the sharemarket.
The survey, called 2000 ShareOwnership, revealed that 40.6 per cent of the Australian adult population (18 years+) invested directly in the sharemarket compared with only 10.2 per cent in 1991. The survey also disclosed that 31 per cent of New Zealand's adult population invested directly in the sharemarket (the New Zealand survey was carried out by the Australian Stock Exchange).
No previous figures were given for New Zealand but in 1991 this country was probably well ahead of Australia because 6.9 per cent of the adult population were shareholders in just one company, Brierley Investments.
There are several reasons why interest in the New Zealand sharemarket has lagged and share ownership in Australia has soared. These are:
* The inept performance of a number of New Zealand's largest companies.
* Poor monitoring by institutional investors and lax corporate governance standards in this country.
* A light-handed regulatory regime which has a bias against individual shareholders.
* The compulsory superannuation scheme in Australia and no saving incentives in this country.
* A government privatisation programme in Australia which has aggressively encouraged a culture of private share ownership.
* A docile New Zealand Stock Exchange which does little to promote the benefits of share ownership.
* Poor marketing by stockbrokers and fund managers in New Zealand.
The high level of overseas ownership has a negative impact on New Zealand's current account (balance of payments) deficit because a large percentage of company dividends flow out of the country.
Small companies also find it difficult to raise equity funds in New Zealand because individual investors are the main source of these funds.
This is reflected in the number of new listings on either side of the Tasman with 142 new companies listed on the Australian sharemarket in 1999 and less than a handful in New Zealand. Two of the largest floats, Tower and Westpac, effectively raised money in New Zealand to fund their expansion in Australia.
The low level of confidence in the domestic sharemarket is negative for the economy because there is a strong relationship between the economy and sharemarket. A healthy free market economy should be reflected in a rising sharemarket and a strong market will benefit the economy through its wealth creation process.
The fundamental outlook for the market is extremely positive but share prices will not achieve any sustained rise until individuals are more willing to invest in the market, either directly or indirectly through managed funds.
The best news for the New Zealand sharemarket, and the economy, would be an incentive scheme for retirement savings and a more favourable regulatory environment for individual investors.
Millennium malaise for sharemarket
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