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Government unable to redress Stock Exchange imbalance

Friday 7th July 2000

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Explanations for sharemarket movements at any given time, or over any given period, depend on the explainer's viewpoint, including whether there is a vested interest. That might seem trite but, like most trite observations, it is factual.

Commerce Minister Paul Swain, for example, reckoned the lack of effective regulations sapped confidence in the New Zealand sharemarket. He has proposed tighter rules as a solution. His policies include a 20% shareholding threshold, after which a full takeover would be required. The proposed threshold would be the same as Australia's but lower than the UK's 30%.

Mr Swain said the 20% threshold was non-negotiable when discussions were held on the five-year old draft takeover code was updated and introduced next year.

He also wants to examine insider trading rules, enforcement of breaches and penalties. Those matters were open for discussion, unlike the takeover threshold.

The Stock Exchange has disagreed with some of Mr Swain's comments, dating back to those made before the election. There may be room for compromise on some matters, but the takeover 20% threshold is set to be immutable.

Sharemarket activity since the election was quiet, as shown in Table II, which lists month-end figures for four Stock Exchange indices.

All four declined, with the small companies index (SCI) having the worst performance. Individual stocks within each index outperformed the global figures, a situation that always applies, irrespective of the timeframe.

The global figures were also subject to the mix of reasons that people decide to buy or sell shares. We have been told overseas investors sold out of New Zealand this year.

When the matter was discussed in NBR (June 2) it was agreed that occurred and was partially responsible for the decline in financial market's and the dollar's slump.

It was noted people who operated out of internal financial centres seemed to allocate the time and money they spent on particular regions and countries roughly in the same proportion as the regions' and countries' share of the total world financial pie. New Zealand therefore got little of the investment manager's time, because time was an administrative cost that could often be better spent elsewhere.

Unfortunately or fortunately, it is impossible to quantify the effect of government policies and actions since the election against other influences. Interest rates rose substantially in the wholesale market between election day and the end of May, although some have eased since the June 28 cutoff date (Table III).

Rate rises have an immediate effect on stocks, such as utilities and the property sector, where dividend yields linked to fixed securities' yields.

Several points can be taken from the data in Table II, again subject to the need to treat global figures with caution. The relatively better performance of the top 10 capital index was a reversal of the situation in earlier periods but it should be noted recalculation of the index had an effect.

Movements in the SCI were also a reversal of earlier periods, although the long-term (several years) trend for that index was reasonably good.

The effect of individual stocks on an index was shown recently in the strong price gain for The Warehouse Group after the retailer acquired a string of stores in Australia. It reached its highest price for more than two years at the end of June when investors approved the geographic diversification. Nothing the government did or did not do since November affected market assessment of The Warehouse.

No government action or inaction was responsible for the fledging technology sector (with the exception of Advantage Group) falling out of the price bed after a collapse of investment euphoria from the high levels of end 1999 and earlier this year.

That collapse followed similar downturns in unproved technology stocks in several countries, particularly the US.

The recent decline in Telecom's share price, taking it close to a two-year low, was another example of a major stock affecting indices. The company has a market capitalisation more than four times that of the second largest group (Carter Holt Harvey) and, even at current levels, accounts for about 20% of the total market.

Some of the decline could be related to government policies and actions and consequent reaction to developments in telecommunications. Telecom's share price is sensitive to changes in interest rates and it is an open question how much movements in that area were the result of government action or inaction.

The New Zealand sharemarket is small, suffers from scrip shortages (because large chunks of the biggest companies are in the hands of dominant shareholders), lacks companies involved in internationally regarded growth sectors and is heavily weighted toward commodity-based industries and those considered mature.

There is consequently a fundamental imbalance compared with other countries. Nothing the Stock Exchange says or does can alter those facts. Nor can the government redress the imbalance.

So look forward to more of the same throughout the rest of the government's term. - Peter V O'Brien

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