NZ lacks the saving graces

By Brian Gaynor

When it comes to investing, New Zealanders are out of step with the rest of the world. We have limited enthusiasm for managed funds, we shy away from our own sharemarket and we have a huge bias towards bricks and mortar.

Despite a high-profile advertising campaign by the Retirement Commissioner, we continue to borrow more than we invest. Since mid-1996 New Zealanders have increased their mortgage borrowings from the banks by $3.21 for every $1 invested in managed funds. By contrast, Australians have invested $3.82 in managed funds for every $1 of new housing loans over the same period.

In total, Australians now have $A456 billion invested in managed funds and $A194 billion of residential housing loans whereas we have housing loans of $52 billion and managed assets of just $37 billion.

Individuals in this country have such a fascination for property that mortgage funds are the largest asset class in the retail fund sector.

Contributing factors to these trends are compulsory superannuation across the Tasman and an under-developed distribution system for managed funds in this country.

Australians also have much more enthusiasm for their sharemarket than we have for ours. Surveys show that 40 per cent of individuals across the Tasman now have either direct or indirect ownership of shares compared with only 21 per cent in 1991. Telstra had 1.9 million original shareholders whereas Telecom New Zealand attracted only 33,000 shareholders when it was listed in 1991.

Managed fund statistics also demonstrate that Australians are much more confident about their sharemarket. Over the past few years, investors have poured money into Australian sharemarket unit trusts and they now represent 22 per cent of all unit trust assets.

In contrast, the total value of New Zealand sharemarket assets has fallen in recent years and they now represent just 13 per cent of total unit trust assets.

These investment trends are reflected in the relative performance of the two sharemarkets. The Australian market has outperformed the New Zealand market by a wide margin and it now has a total value equal to 90 per cent of Australia's GDP. The value of the New Zealand market is just 49 per cent of GDP.

At the other end of the scale are the three major United States sharemarkets which had a combined market value equal to 166 per cent of US GDP at the beginning of the week.

At the end of 1986 the value of the New Zealand sharemarket was equal to 83 per cent of GDP. If the market value/GDP ratio could be lifted to a modest 70 per cent, the NZSE40 Capital index would leap 40 per cent from its current level.

These managed funds, borrowings and the sharemarket statistics make ominous reading for a country which can no longer support a generous tax-funded superannuation scheme and where a strong and vigorous equity market is required to fund the country's business development.

The Government seems to recognise these problems. In his widely reported speech in Christchurch this week Max Bradford, the Minister for Enterprise and Commerce, said we had "to lift our sights and our performance, to a new and sustainable level of economic growth ... [in order] to meet the expectations of our aging population."

Mr Bradford went on to outline a vague, five-point plan.
One of these was to improve "access to business capital (especially international finance) by the knowledge-based economy."

There is nothing wrong with foreign investment, so long as it is used to build new enterprises and create jobs.
However, the best way for people to enjoy their retirement is to have their own nest egg, and the preferred way to finance the country's development is through local capital.

Thus the most disappointing aspect of Mr Bradford's speech was his failure to mention two of the more important factors curtailing economic growth. These are the unwillingness of individuals to save and their lack of confidence in non property equity investments.

The savings debate has been long standing and has yet to be satisfactorily resolved. The architect of the country's economic reforms, Sir Roger Douglas, mourned the axing of the New Zealand Superannuation Scheme by the Muldoon Government in 1976. His suggested alternative has never been implemented.

In 1980 the future Minister of Finance wrote: "Without higher savings we will not get higher investment, unless we put ourselves further into hock to overseas lenders.
The only way people will save more is if they want to save. Make it worth their while.

"We should set up a [voluntary] tax credit savings scheme. Set up an independent corporation to run it.
Tell people that if they invest long-term (say 10 years or more) with the corporation they will get tax credits.

"Channel the capital into priority industries. Direct most of it to small companies and individuals.

"Some people will not want to save with the Savings Corporation. They should not have to do so to get the benefit of the tax credit scheme.

"So let them invest up to 20 per cent of income without paying tax on income earned from that investment for three years. Provided, of course, they invest in priority industries."

Nearly two decades later we still have a very low savings rate and a shortage of non-property equity finance. Sir Roger's voluntary savings scheme requires a few major adjustments but it would help fund the knowledge-based industries that Mr Bradford talks about.
This is a far better option than having to rely on overseas investors. A tax-driven savings scheme would also encourage individuals to save more.

New Zealanders used to have a positive attitude towards the sharemarket but this was badly dented by the excesses of the 1980s and the 1987 crash. For example, at the end of 1986 individuals had commercial bank mortgage borrowings of less than $10 billion and the sharemarket was worth more than $42 billion.

Twelve years later, housing loans have skyrocketed to $52 billion and the sharemarket is valued at just $48 billion. In the intervening period, New Zealand ownership of the market has fallen from nearly 100 per cent to just over a third.

By contrast, sharemarket values in most other countries are well in excess of residential mortgage borrowings.

The trend in New Zealand cannot continue. The unwillingness of individual New Zealanders to save and their reluctance to invest in local equities is a major deterrent to economic growth. If Mr Bradford and his Government are serious about a growth strategy, then the introduction of a tax-driven voluntary saving scheme is a high priority.

Overseas experience shows that tax-driven savings schemes are far more effective at encouraging savings than the Retirement Commissioner's persuasive approach here.