The Crash

In 1984 the new Labour Government had unshackled New Zealand from an era of regulation — currency control, import licences, carless days, wage and price freezes.

The cultural and social change in New Zealand coincided with one of the great global stock market runs. On Wall Street, the Dow-Jones Industrial index rose 282 per cent between 1982 and October 1987.

“I think they’re [the 80s] probably the weirdest decade, not just for hair and clothes and music, but for economic policy in New Zealand,” says University of Auckland professor of economics Tim Hazledine. “We started off with Muldoon in charge and he did his various silly things and then we had Rogernomics.

“So we had a reformed economy and no one really knew how to plan it, I don’t think. They were unstable times.”

In the space of three years the country floated its currency, removed tariffs on imports and subsidies for farmer. The top tax rates were slashed and financial markets were deregulated.

As a result, capital poured into the country but numerous domestic businesses struggled to remain profitable.

Investment companies specialising in takeovers and restructuring jumped on to the stock exchange, raising money from the public to buy up struggling companies, including state-owned companies that the nearly bankrupt Government was racing to sell.

More than 200 companies were floated on the exchange from 1983 to the end of 1987.

By comparison, there have been just 34 initial public offerings (IPOs) on the NZX since 2012.

says Des Hunt, a longtime investor and founding member of the NZ Shareholders Association.

Hunt was working for the then-unlisted manufacturer Tru-Test at the time. He did not get sucked into the hype, despite wondering at the time whether it was him who was the fool.

“My first memory was, we were working our butts off exporting and building a business and thinking: how can all these people have so much money?” he says. “I couldn’t get my head around the valuations.”

He recalls people trying to sell him shares with valuations of 50 or 60 times earnings. It was a stark contrast to his down to earth manufacturing business, which he recalls being valued at just five to seven times earnings.

And there weren’t many experienced dealers around, she says.

“We had a market-led economy, which was new for NZ. Many of us were straight out of varsity and we were all looking at each other ‘oh my God’. It was very much learn as best as you can and do the best you can.

“We didn’t have the sorts of controls and checks and balances we have nowadays,” she says.

“We didn’t have the continuous disclosure requirements. Insider trading wasn’t even illegal in those days [laws were passed in 1988]. It was really was buyer beware.”

With hindsight, Cameron puts the exaggerated rise and fall of the New Zealand market down to two major factors.

“We ended up with a corporate sector that was on average taking on higher business risks than other Western economies,” he says. “Because the liberalisation of the economy meant that a lot of resources were directed into shifting resources around the economy. That tends to be risky activity.”

“The second part of it is we had accumulated much higher leverage ratios than comparable economies ... probably at the private level but certainly at the corporate level.”

Compared to what New Zealanders were used to during the regulated banking environment of the Muldoon years, borrowing was suddenly easy, but that didn’t mean it was cheap.

Interest rates soared through the mid-1980s as the Reserve Bank attempted to tackle double-digit inflation.

By the second quarter of 1987, inflation was running at 18.9 per cent. Floating mortgage rates were above 20 per cent.

Unlike 2008, when central banks slashed rates to revive the economy, there was little room to move.

By January 1988, mortgage rates were still above 19 per cent. By October that year they remained above 15 per cent, even though the economy had stalled and CPI inflation had plunged to 5.6 per cent.

The cost of servicing debt on assets that were falling in value — or in some cases worthless — was crippling.

We’ve always had an issue with investing in property, says Cameron. “But what was worrying from a personal point of view was that property became a platform for people to leverage into the stock market and there were some people who lost all their wealth and their livelihood.

“They leveraged their homes, or in some cases leveraged their farms. I recall an incident where I had a chap ringing me up — probably starting a month before the crash — and he told me he had two farms, both of which were heavily leveraged, and he was investing in a diversified portfolio, and when I asked him what it was ... they were all Brierley shares.

“I said this is a high risk you are taking — you should think about how you manage that — and he was constantly checking on that decision and he got caught.

“His case would have been much more typical [to NZ] than to other economies.”

At the time there was very little focus on financial markets offering high quality choices, having good price discovery, having vehicles that ordinary retail investors could understand and participate in safely, Cameron says.