Today’s market — why boring is good
Today’s market is a ‘ different animal’ from the wild times of the late 80s, veterans tell Liam Dann
“We’ve come a long way,” says NZX chief executive Mark Peterson as he considers the state of New Zealand’s stock exchange on the eve of the 30th anniversary of the 1987 crash.
“The broker model has changed from a trade focus to a wealth management focus,” he says.
“We’ve had KiwiSaver, so you’ve got people more connected to the market. There’s a regulatory regime. Then you’ve got corporate governance for the issuers themselves, which are being held to a higher standard.
“All of that plays out in my mind to be a [ much more] robust ecosystem.” Nobody in the financial markets will ever rule out the prospect of a crash. In fact, some will say it is the one thing you can count on.
But there does seem to be some consensus that the New Zealand share market is a much safer place 30 years on.
“It’s called the New Zealand share market but it’s a different animal completely,” says Milford Asset Management’s Brian Gaynor — who was a broker with Jarden & Co in 1987.
Gaynor says the biggest difference is that — other than a few big life insurers — the vast majority of investors were individuals investing directly back then, as opposed to now, when they are doing it through institutions and KiwiSaver.
“You could say it’s a lot more boring, but boringness can actually mean conservative. It was a lot more exciting in terms of the personalities,” he says. “They were huge and now you get very little focus on personalities. Most people wouldn’t know who ran the electricity companies. Back then it was very much the cult of the personality.”
The companies on the exchange now have moderate debt and real business models with cashflow, says Jim McElwain, executive director of the Institute of Financial Professionals.
“The market was so frothy, you’d get a ride into town with a taxi driver who was driving a Mercedes 190e and he’d talk to you about your share portfolio,” he says.
“People were investing in goats, films and all sorts. There were a number of companies with poor business models. What compounded the problem was leverage, a lot of debt.
“Now you’ve got companies like Fisher & Paykel Healthcare, Auckland Airport, that’s a hell of a lot different from Chase, Equiticorp, Renouf and the rest we had in 1987.”
The other big issue at the time was the interlocking nature of shareholdings, he recalls. “It was common for an investment company to own 30 per cent in another company, which then in turn owned 20 per cent back in the investment company . . . so what it enabled people to do was to control a much larger empire with not a lot of money. When the value of an investee company fell, it just compounded.”
Though it may seem hard for modern investors to believe, insider trading was not illegal in 1987. Laws were introduced in 1988. Geoffrey Palmer, then Minister of Justice, told the Herald that New Zealand needed to shake off its reputation as the “last wild west show” for insider traders.
It was certainly wild times, McElwain recalls. “I always remember there was one company that had a market cap of $ 10m and $ 250,000 of that was the MD’s BMW.”
In an era with no internet, limited disclosure requirements for listed companies and no Takeovers Code, retail investors really were flying blind.
“Kids were ringing me from the school yard,” Gaynor recalls. “There was a boy at Wellington College who was about 14 and he would ring about 11 o’clock . . . there was no internet then, no mobile phones. So nobody knew what was going on, they just had to ring someone.” Gaynor believes that the bad experience many had in the 1980s did irreparable damage to the investing mentality of a generation.
“There was an awful lot of people in their 20s and they got [ massacred] and so they turned their back on the market. That’s one of the reasons the market has changed and so many people have gone into residential property.”
The NZX’s Peterson believes that with the help of KiwiSaver and the market reforms that followed 2008, we are finally moving forward. “I think that has really put the past in the past,” he says. “Sure, there is a generation that remembers it for being a horrible time but most of the world is focused forward.
“I look across the most recent earning season; you’ve got a good range of businesses there. We are a high dividend market compared to the rest of the world. We’re seen as a market that offshore investors will invest into for lower risk rather than take risk.”
Gaynor agrees. “I’m detecting the 20- year- olds getting interested and coming into the market with a different attitude,” he says. “You can’t change the fact that people over 50 have an aversion to the market . . . this will change but it will take time. It’s KiwiSaver working and people feeling sharemarkets are a good place to be.” But he argues the local market has now become too conservative. “If you said back then it was a 10 — with 10 being excessive and completely speculative — then you might say today is a one. It’s electricity companies and Spark, Chorus and Auckland Airport. I’d like it to be more like four or five,” he says.
“Australia is more like that. Because in Australia we see new companies coming to the market.” The lack of new listings on the NZX is one of the signs that we aren’t back to the exuberant days of ’ 87, he says.
Between 1983 and October 1987, more than 200 companies listed on the New Zealand market.
“What happens when you get a lot of capital raising is you get mutton dressed up as lamb. Because they’re attracted by marketing and promotion. But with the market now effectively run by institutional investors, there a lot more scepticism.” The NZX has had just over 30 new listings since 2012.
Peterson — who took on the top job at the NZX this year — sees growing the market and attracting more growth stocks as the next challenge.
There is a constant balancing act between regulation and market freedom.
“We definitely want the market to be bigger. We want it to be simpler. We are conscious of the regulatory burden we place on companies that list in the public domain. But at the same time, being in the public domain does demand a certain standard, so there is that trade-
off. Market integrity is nonnegotiable, quality is really important.” Last month the NZX released a discussion document outlining the proposed scope for its review of listing rules.
“We’ve got to create a mechanism that still allows smaller growth- oriented businesses to come through and source capital and have an ability to trade on secondary markets on the exchange,” Peterson says.
“With the listing rule review, we’re really taking a look at that market structure. How do you simplify it and make it relevant to both the larger end of town and the up- and- comers?”
It isn’t just the number of IPOs, Gaynor says. It’s the demand for them.
“There were two at the end of 1986, one was JudgeCorp and the other was European Pacific investment banking . . . which turned out to be the winebox company,” he recalls.
“People were abusing brokers when they couldn’t get their allocation. Particularly Judgecorp, because Bruce Judge was a very high profile person. That was the worst of it to me at the end of 86.” Those screaming for shares were right — for a while — he says.
“They floated at three bucks and were worth six bucks very quickly. But they were worth nothing a year later.”
That, says McElwain, is the key point for investors as the bull run of 2017 reaches giddy new heights. Our listed companies are strong enough to weather a crash. We saw them do it in 2008.
“The cross share holdings, the debt and poor business models meant that a number of our largest companies actually failed in 1987,” he says. “That’s devastating for investors because if it fails you’ve got no comeback.
“Where, as we saw with the last correction in 2008, while the NZ market fell 40 per cent it has since risen more than 230 per cent. So investors are well in the black. But that only works when the companies survive.”
There is a generation that remembers it for being a horrible time but most of the world is focused forward. Mark Peterson, right You could say [ the market’s] a lot more boring, but boringness can actually mean conservative. Brian Gaynor, left
Philip Solarz says he was a year into his job on the trading floor in Auckland and enjoying the pace when the crash hit — an event which no one had seen the like of before.