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Stock Exchange claims efficiency and success

Friday 18th February 2000

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Vincent Heeringa (NBR, Jan 28) appears to argue two points - that top companies are not performing as well as in some overseas markets (which we agree with) and that this is all the Stock Exchange's fault (which we don't agree with).

Nobody likes someone else doing better so it is natural to look for reasons, but Mr Heeringa should look further than the messenger if he doesn't like the message.

First, New Zealand has not performed as well as other countries recently but the comparisons should be based on gross returns, not capital returns. The NZSE has one of the world's highest yields at 5-7% compared with typically 1-2% and this is reflected in its capital index performance.

Second, markets are a reflection of the economy within which listed companies trade and operate. If the economy and society encourage paying high dividends and not growth (as they have in recent years), and discourage risk and its associated returns, then the market reflects that.

Two major economic sectors are under-represented in the NZSE:

* agriculture - because of the dominance of inefficient co-operative capital structures (also contributing to lower national economic growth);

* banking and finance - because of the dominance of Australian ownership, although this may be changing as banks list mirror shares here.

If New Zealand is growing poorly relative to its trading partners (Australia and the US) we should not be surprised the market performance reflects that. Nor should we be surprised, in these days of mobile capital, labour and technology, if companies seek to go elsewhere to raise capital and do business.

Growing balance-of-payments deficits, the prospect of higher interest rates and a variety of incentives for individuals and companies to be based in offshore locations are gradually reducing New Zealand's comparative advantage. Capital flows are truly international and with its small size the country needs to be stable, progressive and interesting to attract foreign capital.

Failure to follow through on the earlier competitive reforms has let the rest of the world catch up and pass us, so relative poor performance is no surprise.

The third point is that the market (the NZSE) is a facilitator and is not responsible for performance. The NZSE does not "merit regulate" issuers to ensure only high growth or high return companies can list. It provides a market to encourage capital raising, including a listing status that includes making it easier for issuers to raise capital offshore (where it is sometimes more readily available).

The secondary market here is one of the best in the world in terms of efficiency (including the regulation of conduct) but companies here are small by world standards and so the "market impact" costs for large institutional investors can be quite high. These investors are easily discouraged by negative comments from misinformed local journalists who suggest investors are not properly "protected." Encouraging investors to invest offshore reduces demands for New Zealand shares and only makes the share price of listed companies less likely to meet expectations.

The NZSE has maintained world class systems and performance in trading and settlement and progressively reformed and improved the market environment in the last decade. However, better market rules and systems do not necessarily make listed companies perform better.

NZSE rules are different where that is better for investors. If we were not different there would be even less reason for investors to use a national market rather than offshore markets. With internet trading and global brokerage services, it is already easy to trade in any market through a NZSE member.

The NZSE listing rules, companies and securities laws are different in New Zealand because that gives local investors a benefit. When or if we cease to be smarter, more efficient, or different for good reasons then, like the car assembly industry, New Zealand will no longer have, nor need, its own national securities market.

The NZSE will continue to facilitate trading in the best possible way, even if that is as part of a regional or global networked market.

Complaints about the handling of larger listings such as Contact Energy are isolated and reflect the broader disappointment of investors with company performance. Nonetheless we hope to ensure this does not happen in future.

In a positive sense, processing problems in new floats are a reflection of the size of those issues and the associated logistics problems in handling applications. Look at the latest Telstra float with its extensive allocation delays and errors. People have put up with that because the price has stayed up.

Are they really complaining in the case of Contact because they couldn't sell soon enough, or because the price didn't go up to suit them?

Finally, Mr Heeringa notes "in New Zealand, best estimates put direct shareholding at 8-16%." A recent ASX international comparison puts New Zealand fourth out of sixth in direct share ownership at 31% and fifth out of six in all forms of share ownership at 38%. New Zealand and the US are virtually the same in terms of the level of direct ownership. As the research shows, New Zealanders are participating strongly in the international trend to become shareholders.

W P Foster
Managing director
New Zealand Stock Exchange


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