Kiwis with long memories may be reluctant to invest in shares, recalling the 1987 stock market crash
The benchmark NZX 50 Index may have gained 18% this year, but the reality remains many more people are interested in mortgage interest rates than share prices. The stock index has a market value of $41.9 billion compared to $168 billion of home loans.
Yet there are two big factors looming that may bring stocks back into vogue for New Zealand investors. For a start, KiwiSaver funds are starting to allocate more of their cash into equities, so indirectly more New Zealanders are becoming more exposed to the stock market.
Secondly, the Treasury is starting work on how to sell up to $7 billion of state-owned power companies, a coal miner and part of its stake in Air New Zealand over the next three to five years.
These will be big IPOs (share floats) for the New Zealand market touted and Mums and dads will be encouraged to buy.
Treasury estimates say the local stock market could be enlarged by 10% in value when the SOEs are sold.
Some kiwis may have forgotten the stock market. Those with long memories may be reluctant to return, recalling the 1987 stock market crash, more than a generation ago now.
A chart of the now-defunct NZSE 40 Index shows why. That benchmark sharemarket index of the day reached stupendous heights in the run-up to that crash, with more hot air than its overseas counterparts. It remains a high tide mark in New Zealand, even though the 1987 crash has been reduced to a blip on the chart of the S&P 500.
The stock market, though, hasn’t died in New Zealand. So far this year some $750 million of equity has been raised on the NZX. On that run rate, some $2.3 billion of new shares may be sold on the bourse this year, up from 2010’s $1.4 billion.
That’s a drop in the ocean next to total bank deposits, but still a healthy enough demonstration that serious funds can still be raised here for the right companies, and the part-privatised SOE’s will almost certainly be viewed favourably.
The government is hoping to create a feel-good factor around the sale of state assets that would end up trading on the NZX, like it managed with the $1.1 billion float of Contact Energy in 1999.
Contact, which grew out of the old Electricity Corp. assets, was sold 40% to Edison Mission Energy and 60% in an IPO that attracted a record 227,000 local retail investors. The residue of those shareholders still own 22% of the company, with 51.4% owned by Australia’s Origin Energy. Since listing in 1999, the shares have climbed 72%.
Should National be re-elected, it has vowed to sell minority stakes in its four energy companies – Meridian, Genesis, MightyRiverPower and Solid Energy – and its three-quarters stake in already-listed Air New Zealand.
The Treasury has already been tasked with hiring advisers to start work on the sales process. Early signs are the most sought after share will be coal miner Solid Energy would attract interest in Australia, which has a trove of listed coal companies and can barely keep up with demand for coal for both electricity generation and steel-making from China, Japan and India.
The asset sale programme is partly a result of the argument created by the Capital Markets Task Force that the kiwi obsession with property investment over other asset classes will only be broken in New Zealanders have high quality alternative local investment options.
The debacle over failed finance companies has left many ordinary New Zealanders scarred and scared that smart-money types will find new ways to siphon off their life savings. But the stock market increasingly is going to come back into focus over the next few years.
It is governed by strong regulation on disclosure and for the largest stocks, offers enough liquidity to be a real market. A balanced portfolio will always contain some cash and longer term deposits, but a growth-oriented investor can’t ignore equities forever. With the economy apparently on the upturn, it’s something to think about.