Reflecting on the heady heights of ’ 87
30 years on from the market crash, what has changed?
Thirty years ago, on Friday, September 18, 1987, the longstanding NZX benchmark index reached an all- time high of 3968.89. This capital index, which is now called the S& P/ NZX 50 Index, has never returned to this level and is still 8 per cent below its 1987 high.
What were market conditions like 30 years ago and are there any lessons to be learned from the 1980s sharemarket boom and bust?
The benchmark Barclays Industrial Index closed on Friday, September 11, 1987, at 3883.61, an alltime high at the time.
The main market drivers were: A huge number of IPOs; there had been 57 new listings to date in 1987. A spate of partial acquisitions and full takeovers. NZX- listed companies expanding feverishly offshore. Widespread market participation by individuals, often through borrowed funds. The Herald reported on Saturday, September 12 that brokers believed “there was little doubt that the sharemarket would reach new highs this month with the Brierley Investment stable of companies about to start reporting”.
The business pages revealed that Wellington- based property company Aurora Group, which was 78 per cent owned by Equiticorp, was making a takeover offer for British property investment company Hampton Trust, while Smiths City Group had purchased the domestic retailer Smith & Brown from Feltex.
In addition, Equiticorp was bidding for British- based Guinness Peat Group ( GPG), and Prorada Properties was “highly liquid” and was looking at development projects in the US and Australia.
Rada Corporation, which was the major shareholder in NZX- li sted Prorada Properties, held its annual meeting on the Friday. Managing director George Wheeler told shareholders the globalisation of Rada was inevitable while chairman Bob Gunn said that up to six parties had shown interest in Rada’s 42 per cent stake in NZ Forest Products. Gunn said that one party had mentioned a price of $ 6 a share compared with NZ Forest Products’ market price of $ 5.03.
Max Gunn, effectively a one- man Shareholders’ Association at the time, was the only dissenting voice at the Rada meeting.
But Herald business editor Malcolm McPhee also had a warning in his Keeping Account column on Saturday, September 12. Under the heading “Profit Definitions Need Consistency”, he noted that companies had inconsistent accounting policies, making it difficult to compare reported earnings.
The market opened on Monday, September 14 with the news that Countrywide Banking would list after the completion of its IPO. In addition, two listed Christchurch companies, Mainstay Properties and Advantage Corporation, announced a merger, Ariadne reported a 159 per cent increase in net earnings and Equiticorp rejected an offer from Robert Maxwell for its GPG stake.
It was also revealed that Brierley Investments was looking to build a stake in Texas- based Triton Energy Corporation and Olly Newland’s Landmark was on the move with plans “to bid for at least one commercial building in Honolulu”.
There was widespread comment about a British Mail on Sunday story that touted Fletcher Challenge as the latest “Kiwi predator” stalking the City of London.
The Herald’s market comment for the first day of the week reported a broker as saying that “the upward momentum should continue in the short term”.
The big developments on Tuesday, September 15 were Renouf Corporation’s announcement of a $ 134.7 million profit for the 15 months to June 30 and European Pacific’s $ 13.5m profit for the six months to June. European Pacific, which later became known as the “wine box” company, had been floated on the NZX at the end of 1986 by Brierley Investments, Capital Markets ( Fay, Richwhite) and Bank of New Zealand.
Bank of New Zealand, which was chaired by Sir Ron Brierley at the time, was a major contributor to the frenzied borrowing by listed companies in the 1980s.
The market report for Tuesday said Brierley Investments, which rose 15c to $ 5.25, was the highlight of the day. Brokers reported that “much of the push was coming from private client buying” and “the market had further room to rise, as with many 1987 results reported investors could now look towards 1988 year results”.
Wednesday opened with the news that Equiticorp was poised to gain control of GPG, while Ron Brierley’s Industrial Equity ( Pacific) announced a 158 per cent increase in net profit for the June year.
John Spencer’s Caxton group also announced it had purchased 20 per cent of Baycorp, to bring its holding to 40 per cent.
A broker reported after Wednesday’s market close that “the market was firmly underpinned at present levels by demand for the blue- chip stocks and was expected to climb to new highs”. Another broker noted that the NZX futures contract closed at a 79- point premium to the physical index but there were several finance company advertisements on the same page offering between 17.5 per cent and 19 per cent on deposits. The highlights on Thursday were the announcement that Australia’s FAI Insurance had acquired 20 per cent of Renouf Corporation and the latter would undergo a significant change in direction. The deal was negotiated by FAI’s Larry Adler and Sir Frank Renouf, t wo major casualties of the subsequent market crash. Owens Investments’ managing director, Roger Fisher, told the company’s annual meeting it had acquired a property in Port Botany, Sydney, that would form the basis of an IPO and stock exchange listing of Owens Property. The front page of the Herald’s Business Report on Friday, September 18, 1987, had a story about the launch of a game called Takeover, with the claim that it could be as popular as Trivial Pursuit and Monopoly. Sir Robert Muldoon, Roger Douglas, Mike Moore and Doug Graham would all participate in the launch at Auckland’s Regent Hotel on Monday evening. The report said the aim of the game was “through skilled trading and a bit of luck, players can build up a portfolio with the aim of making a complete takeover for one company”. The Herald also reported that the Financial Times had praised Equiticorp for its apparent success in the battle for GPG and on Thursday “the New Zealand sharemarket posted its fifth consecutive advance”. It went on to report that “brokers were again confident of the market’s outlook, particularly since Friday has tended recently to be a firm day”.
Friday’s Business Report also had a youthful photo of Andrew Krukziener, who later developed Auckland’s Metropolis building. Krukziener was heading to Sydney to help drive the global expansion of Ollie Newland’s Landmark Corporation.
Friday, September 18 was a relatively quiet day with Peter Menzies announcing that Mainzeal Group would seek to relist on the NZX through Mainzeal Properties and Smart Group issued a “don’t sell” because it was in discussions with another property group.
The market edged higher on low turnover with brokers indicating that there might be “a bit of volatility in the run up to the ‘ witching hour’ of the Barclays September futures contract which has seven days to go”.
McPhee’s Taking Account column on Saturday was about Brierley Investments’ forthcoming profit announcement, which was expected to be around $ 350m compared with $ 178m for the June 1986 year.
But that was it as far as the New Zealand sharemarket boom was concerned; without any new warning the index drifted steadily lower to 3584.69 on Friday, October 16 and crashed the following week.
At the end of 1987 the Barclays benchmark index was 1949.42, a staggering 50 per cent below its September 18 high. Selective stock movements between the September high and year end were: Brierley Investments $ 5.31 to $ 1.95; Capital Markets $ 3.94 to $ 1.33; Chase $ 5.01 to $ 0.90; Fletcher Challenge $ 7.55 to $ 4.22; Equiticorp $ 3.86 to $ 1.27; and Renouf Corporation $ 3.06 to $ 0.42.
The good news is that most of the negative characteristics of the 1980s — poor quality IPOs, irrational takeovers and debt- fuelled overseas purchases — don’t exist today, although companies continue to emphasise normalised or adjusted earnings, instead of figures that are fully compliant with accounting standards.
This i s a clear reason why accountants and auditors shouldn’t allow public offerors to fudge their figures.
Brian Gaynor is an executive director of Milford Asset Management.
At the end of 1987 the Barclays benchmark index was 1949.42, a staggering 50 per cent below its September 18 high.