Nobody loves us, everybody hates us

By Roger Armstrong

Friday 1st November 2002

Foreigners are fickle friends to us New Zealanders at the best of times. But when money is involved, "fickle" doesn't adequately cover the propensity for foreigners to change their minds about our country. They love us, they hate us, they love us again.

Offshore investors adored us in the late 1980s and early 1990s, lured by the hypnotic call of an economic free market nirvana being constructed by first Roger Douglas and then Ruth Richardson. This saw foreigners - both companies and institutional investors - at one stage owning over 60% of our market, with New Zealand managed funds and retail investors owning just 30% of listed shares (now up to 35%). In very recent times some foreigners have started appreciating us again, with our stability standing out in a world awash with scandals and slumping share markets. But basically a foreign exodus started when Jim Bolger took a tea break and Labour a step to the left.

The recent exit of the overseas corporate owners - of United Networks and Tranz Rail, for example - isn't new. The table overleaf suggests overseas corporates have gone from owning close to 30% of our market to 25% as of last December and probably a few percent lower today. If there is any truth to the persistent rumours that Verizon wants out of its stake in Telecom, then the reduction of overseas corporate ownership of the New Zealand market will have been dramatic.

It is not just the overseas corporate owners who have been leaving. Offshore institutional investors have, in investment-speak, been "decreasing their exposure" to the increasingly left-leaning New Zealand economy for a number of years. In a recent speech, NZSE chief Mark Weldon said our share market has "a very serious reputational problem that we absolutely must fix" and mentioned two of the world's largest funds having New Zealand on their "banned" list.

The table shows that the overall level of ownership by offshore institutional investors went from 31% to 22% between 1997 and 2001. The overall statistic hides some bigger changes in the type of overseas owner in our peculiar market.

US and UK investors have in effect been replaced by Australian institutions that are more in synch with our financial culture and political pragmatism than your average New Yorker.

Whether foreigners love our share market is not particularly important, as long as someone does. Trouble is, not only have foreigners deserted our market over the past few years but locals have pulled out, too, seeking sexier opportunities overseas.

Until the financial market deregulation of the first Lange government, New Zealand fund managers weren't allowed to hold investments offshore, but when the rules changed, many shifted funds offshore. That was okay when overseas investors loved New Zealand, but when New Zealand stopped being fashionable in the mid-1990s, local fund managers continued to diversify offshore.

The average superannuation fund manager has gone from having 20% of its money in New Zealand shares in 1996 to around 14% today. With individual punters concentrating on the housing market, and possibly a few capital notes securities for backup, funds flow from savers into the New Zealand market over the past five years has been non-existent, possibly negative when you take into account the withdrawal from New Zealand of overseas savings.

So, ironically, it is a government initiative - the New Zealand Super Fund - that looks set to dictate the likely state of the share market over the next 10 years. Recent research by broker JB Were indicates the government is set to become a major investor in New Zealand shares. The company estimates that if the New Zealand Super Fund adopts the superannuation industry average of putting 14% of its money into New Zealand shares, there will be an inflow of $300 million into the New Zealand share market a year.

Some experienced market watchers talk of the Super Fund being a market elixir, but this is by no means certain. The New Zealand Super Fund could simply facilitate the exit of a few more foreigners.

The percentage of the New Zealand Super Fund's money put into the local market will be crucial. Superannuation funds have tended for some time to hold considerably more money in overseas shares than New Zealand shares, but the performance of the New Zealand market relative to those overseas over the past two years, combined with the increasing benefits of the dividend imputation regime, may tempt NZSF board members to adopt a more aggressive approach to buying New Zealand shares in its formative years.

At the level postulated by JB Were, the New Zealand Super Fund will have about $5 billion invested in the market in 10 years, which, assuming moderate growth in market capitalisation, should equate to around 7% of the then market.

Even free-market, right-wing capitalist share investors abhorrent of government involvement in private enterprise should applaud that.

Roger Armstrong is an independent financial analyst

Disclosure of interest: Roger owns shares in, and is a director of, Tranz Rail

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