Get­ting your share

The NZX is work­ing hard to cre­ate value as the bor­ders blur for in­vestors and com­pa­nies.

New Zealand Listener - - THE INVESTMENT GAME - By JONATHAN UN­DER­HILL

Any­one who bought A2 Milk shares at the start of this year has more than dou­bled their money, but if they bet on Sky Net­work Tele­vi­sion, their in­vest­ment is down about 30%. NZX chief ex­ec­u­tive Mark Peterson says there’s a “safer” way to get ex­po­sure to the share­mar­ket for new in­vestors – man­aged funds and ex­change-traded funds (ETFs). NZX’s NZ Top 50 Fund, which in­vests in the 50 big­gest se­cu­ri­ties on the NZX main board, has gained about 13% this year.

NZX has 23 such ETF funds un­der its Smart Shares brand, pro­vid­ing ex­po­sures rang­ing from ma­jor global bench­marks and emerg­ing mar­kets to prop­erty and bonds.

Al­to­gether, 836 mil­lion units of th­ese funds are on is­sue, and funds un­der man­age­ment to­talled $1.9 bil­lion as at July 31. That’s up from 173 mil­lion units and $300 mil­lion in July 2012.

Peterson says the NZX has just recorded five straight months of record growth in peo­ple sign­ing up to Smart Shares. Mil­len­ni­als are one of the growth mar­kets. Bro­kers say there’s been a no­table pick-up in in­ter­est in the share­mar­ket from un­der­for­ties, per­haps be­cause their KiwiSaver ac­counts hold shares or be­cause they see home own­er­ship as out of reach.

That’s a pos­i­tive sign for a mar­ket op­er­a­tor that has some­times strug­gled to grow. It cur­rently has 163 listed com­pa­nies and 116 listed debt se­cu­ri­ties, lit­tle changed from July 2012 when there were 169 and 102 re­spec­tively. So far this year, some $480 mil­lion of new com­pany shares and $2.1 bil­lion of debt cap­i­tal have been raised via the NZX.

The NZX has worked hard to stay rel­e­vant. It launched two spe­cial low-cost mar­kets: NZAX for com­pa­nies with lower val­u­a­tions (so-called small-caps) and

NXT for start-ups. But lack of in­ter­est and of ac­tiv­ity at this end of the mar­ket has prompted the com­pany to re­assess – it’s likely to ab­sorb the two back into its main NZSX board.

It ac­quired and then sold the Clear Grain Ex­change in Aus­tralia and has re­struc­tured its agri­cul­tural as­sets, sell­ing agri mag­a­zines it had ac­quired to pro­vide a full suite of ser­vices tied to the pri­mary sec­tor.

The value of shares listed on the NZX has in­creased 113% to $125.9 bil­lion in the past five years. In that time, the me­dian house price has gained 42%. But there’s still a mas­sive gap: on the Kiwi house­hold bal­ance sheet data the Re­serve Bank pub­lishes, hous­ing and land were val­ued at $758 bil­lion.

Across the Tas­man is a much deeper pool of eq­uity cap­i­tal. The to­tal value of shares listed on the ASX is about A$1.5 tril­lion. There are 53 New Zealand­based com­pa­nies listed there, of which 38 have their pri­mary list­ing on the NZX and a for­eign-ex­empt list­ing on the ASX.

Oth­ers went straight to the ASX – 9 Spokes In­ter­na­tional, Ad­herium, Martin Air­craft Com­pany, Neuren Phar­ma­ceu­ti­cals, Pow­er­house Ven­tures, Tomi­zone, Vol­para Health Tech­nolo­gies and Wan­gle Tech­nolo­gies were all at­tracted to be­ing listed in a big­ger mar­ket.

The jury is still out on whether it was the right move. Last month, Chap­man Tripp part­ner Rachel Dunne said they might be bet­ter off com­ing home. For a start, a New Zealand-based ASX-listed com­pany has twice the pa­per­work com­ply­ing with two reg­u­la­tory en­vi­ron­ments. It could still get the ben­e­fit of the ASX’s larger pool of cap­i­tal with a pri­mary list­ing on the NZX and an ASX for­eign-ex­empt list­ing, she said.

Then there’s the fact of be­ing a small com­pany in a big mar­ket rather than be­ing small in a small mar­ket.

“Be­ing a min­now in a large mar­ket like the ASX does present chal­lenges for listed com­pa­nies, and it is telling that all of the New Zealand com­pa­nies that chose to list solely on the ASX have had poor shareprice per­for­mance,” Dunne said.

But small-caps have also strug­gled on the NZX. In June, G3 Group said it might quit the NXT mar­ket just two years af­ter join­ing it in a com­pli­ance list­ing. Last month, share­hold­ers of GeoOp ap­proved a plan to re­lo­cate to the ASX from the NZAX and raise funds via an ini­tial pub­lic of­fer­ing. Fu­ture Mo­bil­ity So­lu­tions, the com­pany for­merly known as SeaLegs, said in June it plans to delist from the NZX as the mar­ket is too small.

Shel­don Slab­bert, a sales trader at CMC Mar­kets in Auck­land, says part of the prob­lem is that Ki­wis are sur­rounded

by global brands – Ap­ple, Mi­crosoft, Nike – but they aren’t di­rectly in­vestable through the lo­cal ex­change. He also says the NZX may still not be do­ing enough to mar­ket its wares.

“You look at any news­pa­per and there are pages and pages of prop­erty porn,” he says. “There’s very lit­tle al­ter­na­tive in­vest­ment be­ing touted.”

CMC of­fers con­tracts for dif­fer­ence (CFDs) – bets on the move­ments in un­der­ly­ing se­cu­ri­ties in­clud­ing cof­fee fu­tures, cur­rency pairs, gaso­line or pork bel­lies that the in­vestors don’t ac­tu­ally buy or sell.

They’re com­plex prod­ucts, but Slab­bert says his clients have a bet­ter sense of risk than some lever­aged prop­erty in­vestors. “There’s an op­por­tu­nity cost in this con­cen­tra­tion of risk in prop­erty. It is pre­vent­ing peo­ple from po­ten­tially cre­at­ing real wealth.”

He also notes that prop­erty “is a long-only trade. It doesn’t give you the op­por­tu­nity to go short. When prop­erty prices fall, you’re just go­ing to have to grin and bear it.”

Go­ing short – bet­ting that a se­cu­rity or in­dex is go­ing to fall – may be tempt­ing for some eq­uity in­vestors now. The bench­mark NZX 50 In­dex is cur­rently at a record high and an­a­lysts are still crunch­ing their num­bers on whether the cur­rent earn­ings sea­son will pro­vide jus­ti­fi­ca­tion for shares to be trad­ing at such high mul­ti­ples.

In ASB Bank’s lat­est sur­vey of in­vestor con­fi­dence, 78% cited a bank sav­ings ac­count as their main in­vest­ment, com­pared with 15% of peo­ple who had shares as their main or other in­vest­ment. Some 58% cited KiwiSaver as their main in­vest­ment, ahead of the 54% of peo­ple who cited their own home.

Term de­posits were al­most twice as pop­u­lar as shares, at 27%. Man­aged funds stood at 15%. po­ten­tial an­nual bonus in re­turn for a smaller sum that bumps up the in­come they can re­port to the bank, al­low­ing them to bor­row more.

But in 2017, the Gen­er­a­tion Rent con­cept pop­u­larised by econ­o­mists Shamubeel and Se­lena Eaqub – who re­cently took the plunge and bought a house – is shap­ing new de­bates about the next gen­er­a­tion’s home­own­er­ship ex­pec­ta­tions.

“They’re all sort of des­per­ate to be in the game,” says Gaynor, “but it’s ac­tu­ally quite dif­fi­cult. But they’re not de­pressed over it. Hu­man be­ings are re­mark­able. They get used to what­ever the con­di­tions are.”

TOP­PING OUT

Ex­ac­er­bat­ing the chal­lenge posed by the un­af­ford­abil­ity of house prices is the prospect that the hous­ing mar­ket may be top­ping out, erod­ing the po­ten­tial for cap­i­tal gains, at least in the short term. Prices in Auck­land fell 2.5% over the three months to the end of July, ac­cord­ing to the Real Es­tate In­sti­tute of New Zealand, prompt­ing Prime Min­is­ter Bill English to urge the Re­serve Bank to for­get about im­pos­ing fur­ther lend­ing re­stric­tions.

The con­di­tions may spur new in­ter­est in home buy­ing, as in­creas­ingly debt-shy banks, lo­cal buy­ers with­out enough saved to make a de­posit, and a slow­down in in­ter­est from for­eign buy­ers all con­trib­ute to a slow­ing in house-price in­fla­tion.

From here, the up­side in res­i­den­tial prop­erty is less clear, mak­ing it more likely that savers and in­vestors will look for new places to find bet­ter re­turns than the 3% in­ter­est in a bank ac­count. The cat­a­lysts for new con­ver­sa­tions about in­vest­ment are in place.

“There are lots of places in the world where you wouldn’t ex­pect to own a house,” says Ains­ley McLaren, an in­vest­ment mar­kets spe­cial­ist and Fi­nan­cial Mar­kets Author­ity board mem­ber who spoke to the Lis­tener in a per­sonal ca­pac­ity as she pre­pared to take up a new role with Welling­ton-based funds man­ager Har­bour As­set Man­age­ment.

“There are some is­sues around te­nancy in New Zealand, to help peo­ple get into longterm ten­an­cies where they can ac­tu­ally feel some sense of sta­bil­ity in the place that they live so they can stamp their own mark on it. Short-term te­nancy agree­ments get in the way of peo­ple favour­ing rent­ing.”

But the mood to fix that is grow­ing. Most op­po­si­tion po­lit­i­cal par­ties are promis­ing full-scale te­nancy-law re­form to re­move bar­ri­ers to long-term rent­ing and make it fairer for ten­ants. If that starts hap­pen­ing and with house prices likely still to be many times more than the av­er­age house­hold in­come, in­vest­ing what would have

“There’s an op­por­tu­nity cost in this con­cen­tra­tion of risk in prop­erty. It is pre­vent­ing peo­ple from po­ten­tially cre­at­ing real wealth.” Prices in Auck­land fell 2.5% over the three months to the end of July.

NZX’s Mark Peterson and Chap­man Tripp’s Rachel Dunne.

Fi­nan­cial Mar­kets Author­ity’s Ains­ley McLaren and Com­mis­sion for Fi­nan­cial Lit­er­acy’s David Boyle.

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