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Technically Speaking: Don't listen to vested interests ­ Australasian market will work

Friday 14th July 2000

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Ports of Auckland

Auckland International Airport

Telecom

Natural Gas

TransAlta

Standard & Poor's has just finished passing its verdict on the creditworthiness of major New Zealand companies.

Conservative sharemarket investors might take the attitude that they would not invest in any NZSE-listed companies that lacked an S&P or Moody's rating.

If that were the case, the New Zealand sharemarket would have pathetically few choices.

The locally listed companies rated by S&P number just 13 and in descending order are: Ports of Auckland (AA+), Auckland International Airport (A+), Telecom(A+), Natural Gas Corporation
(A-), TransAlta New Zealand (A-), Contact Energy (BBB+), Brierley Investments (BBB), Fletcher Challenge (BBB), Tranz Rail (BBB), Carter Holt Harvey (BBB-), Nufarm (ex Fernz Corporation, BBB-), Air New Zealand (BBB-) and Lion Nathan (BB+).

The A-team five are shown in the charts with 40-week moving averages. Of these 13, three in BIL, Nufarm and Lion Nathan are now expatriate.

Of the rest, Telecom, Contact Energy and Carter Holt Harvey are on record as considering a head office move overseas.

Some, such as the airport, the seaports and the airline, are probably non-transferable abroad because of the nature of their assets, but the rest could just as easily shift elsewhere if they built a bigger foreign share of business. Of the S&P-rated Kiwi companies, a mere five are A-grade.

The sharemarket is a dead loss at looking at its listings from the credit rating viewpoint. The Stock Exchange seems to realise this in its proposal that there be a common transtasman platform for its biggest listings.

The NZSE is a vested interest and not an objective observer in the debate over sharemarket direction. Its argument that smaller companies and venture capital outfits should remain listed on separate New Zealand boards because they would get lost in a bigger transtasman market is self-serving hogwash. The staff of the NZSE and local small company and venture capital sharebrokers are obviously keen to retain their jobs.

Australia is a better market to raise equity capital in than New Zealand. There are more investors over there, along with greater capital resources and generally lower interest rates.

Superannuation funds are tax-incentivised in Australia.

Australians are surely desirable and well-qualified potential investors in smaller New Zealand firms.

The NZSE's position is anti-competitive on capital raising. Smaller companies and venture capital enterprises would benefit from the competitive pressures of equity raising in a bigger market.

Many of them are surely of better quality than some Australian listings and those that are not deserve to get trashed. Dud companies should be purged rather than soak up undeserved capital. New Zealand's sharemarket is overloaded with corporate bludgers on long-suffering shareholders.

Incredibly, NZSE chairman Eion Edgar is on record as saying a merger of Australasian sharemarkets would add little value to shares in New Zealand companies. He is wrong on several counts.

A merged sharemarket would rank further up in the "finger of God" Morgan Stanley capital index, attracting more international fund manager capital.

In addition, New Zealand-based companies that trade on a merged sharemarket could fall under the ambit of managed funds trust deeds that require Australian listing as a precondition of investment. There would also be greater information flow about New Zealand-based companies in a bigger transtasman sharemarket.

These days stock exchanges trade in information, which in turn influences share prices. More information dissemination can mean better share prices when company quality merits investor support. Small companies and venture capitalists surely want to broadcast their news as widely as possible.

It would be helpful if the NZSE stopped treating New Zealand investors like mushrooms to be fed manure and kept in the dark.

A red herring in the debate is the claim per-transaction charges in New Zealand are lower than in Australia. Australian charges are still not high enough to deter trading, although obviously they should come down.

This is happening anyway because the Australian Stock Exchange now permits in-
vestors to undertake direct floor trading, bypassing ASX keypunch operators.

Mr Edgar is reported to have philanthropically offered his advice to the ASX, which no doubt will be thrilled to learn how you lose three top-10 listings in a year.

Do S&P ratings make any difference to share prices and therefore investment decision making? Yes and no.

In the short term, it is unlikely a S&P rating means much for share value, save for temporary shocks that might occur when a rating goes up or down.

But in the long term, an S&P rating is a credible, albeit scaled, vote of confidence in a company's business plan where debt is involved.

S&P has not approved, for example, of Telecom's debt-funded foray into AAPT, cutting the company's credit ranking from AA-, which was close to the New Zealand government's AA+, to A+, a significant demotion.

The agency has also knocked back Carter Holt Harvey from BBB to BBB- despite the sale of its Chilean assets, which could have bearing on the interest rates that this long-term, slow-payoff corporate investor must pay in the meantime.

S&P credit ratings have a direct influence on the interest rates a company would pay on debt and that in turn has implications for dividend payouts and consequently the share price.

A transtasman sharemarket would give New Zealand investors more access to S&P's and Moodys' rated investments, which would be good. It would be a pity if local vested interests denied New Zealanders the international-grade sharemarket they deserve in order to keep jobs for the boys.

New Zealand said goodbye to protected garment and car assembly industries.

Perhaps it should be doing the same to the NZSE and its membership.

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