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

Weekend Herald - - BUSINESS -

“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.

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