Farewell Feeble 40, all hail Futile 50

By Shoeshine

Friday 22nd November 2002

A tweak here, a fiddle there and presto: the Stock Exchange's spanking new NZSE50 index is ready to roll save for a last, rather pointless submission period.

In the end, how much difference will it make? Very little, probably.

In the new 50 index, the top-seven spots remain unchanged. Telecom goes up to a 27.2% index weight, from 22.6% on the old 40 index. From there down, in unchanged order, are Carter Holt Harvey, The Warehouse, Contact Energy, Lion Nathan, Sky City and Auckland International Airport.

From number eight downward things start to bounce around a bit.

The losers are Air New Zealand, whose weight falls by more than two-thirds to 1.13%, Sky TV, Natural Gas Corporation and the Auckland and Tauranga ports.

Conspicuous winners are AMP and AMP Office Trust, Infratil, and ANZ Bank.

Word has it there has been some furious lobbying around the issue of how the 50 will be run. But as the exchange hasn't released the round one submissions it's hard to tell who's been lobbying for what.

The general view seems to be that the 50 is "less bad" than the 40. Nonetheless a fair few market participants wonder whether the exchange's apparent agenda of forcing liquidity out of the big stocks into smaller ones will work, or whether it's even desirable.

For one thing, although some stocks will see some short-term demand as passive index-tracking funds buy enough stock to give them an index weighting, that's a one-off event.

After that the share price will be determined by the performance of the underlying business.

For another, most of the "new" stocks have already been picked over by active investors and the good ones aren't cheap.

Under the exchange's 50 Mk 2 proposal, there is only one change of any significance and the impact will be, paradoxically, on the newcomers.

Under the previous proposal, stakes of 10-20% would be excluded only if they added up to 60% or more.

Under the new rule any stake of 10-20% will be excluded if it's "strategic," defined by the exchange as held by government or government agencies, "controlling and strategic" shareholders, "restricted holdings such as Treasury stock or strategic holdings" and "any other entities or individuals which hold more than 10% in a strategic holding."

In other words, it's strategic if it's strategic.

Of the 12 companies that will join the 50 index (TrustPower and Foreign & Colonial Investment Trust, now on the 40, won't make it), seven will have excluded 10-20% holdings.

The highest weighting will be Powerco at 0.62%; the average will be 0.37%. The unchanged top seven will have 59% between them. Telecom alone will have 27.2%, up from 22.6% on the 40.

So the amount of liquidity the new index will deliver to trading in the new stocks will be, to put it bluntly, bugger all. Which begs the question why bother?

Who should run the indices?

The exchange's move to calculating its benchmark index on a "free float" basis is completely independent of the move to a 50-stock index and it has won backing as a sensible and necessary change. Morgan Stanley, which runs the MSCI world indices, shifted to free float last year. The Australian Stock Exchange followed suit earlier this year.

Neither free float nor the new index address the question of whether the exchange should be running the indices at all.

It's hard to think of another developed country where indices aren't run by independent, external organisations: Dow Jones and Standard & Poor's in the US, the Financial Times in Britain, S&P in Australia, Nikkei in Japan.

It used to be to be that way here too. The main sharemarket index, dating back to 1957, was once run by Sir Frank Renouf's New Zealand United Corporation (NZUC), which was taken over by British high street bank Barclays.

The Barclays industrial index ran until September 1991 when Barclays gave up trying to establish its BZW arm as a global investment banking force.

The Stock Exchange then took it over, changing the name to the NZSE40 and introducing a range of secondary indices.

In those days there simply wasn't anybody prepared to take the job on.

The only competitors had been newspapers but the New Zealand Herald's index was dropped several years ago and the Auckland Star's all ordinaries' index, which went online in the 1980s when the paper introduced real-time share reporting, disappeared when the title closed in August 1991.

Who compiles and sets the rules for financial indices is driven largely by simple economics. The business groups who run the FTSE, Nikkei, and S&P indices recoup the costs of doing so through direct and indirect charging and through synergies with their other activities.

The exchange last year derived just over 20% of its revenue or $2.2 million from "the sale of market information."

Up until now, as a mutual, it has aimed to keep costs for market participants as low as possible. As a public company due to list on its own board next year that aim will presumably change to revenue-maximisation, suggesting big fee rises for market information users could be on the cards.

The declared aim of revamping the headline index is to "grow and improve the integrity of New Zealand's capital market."

The NZSE has so far proved shy of explaining quite how the new 50 will achieve that or what was wrong with the old 40.

Comments from our readers

No comments yet