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The O'Brien Column: Why sharemarket investors are unlikely to fight for local stock

Friday 18th August 2000

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It is going to take more than a contract with a public relations firm for the Stock Exchange to overcome the sharemarket's basic problem.

That problem is summarised in the table, which groups listed stocks in market capitalisation bands and shows the percentage of each group to the total (127) and the percentage that each band's capitalisations bear to the capitalisation of the 127.

Mining companies were excluded from the analysis and only the New Zealand component of overseas-based compan-
ies was included in capitalisation figures, as in The National Business Review's sharemarket table from which the figures were extracted. Fletcher Challenge letter stocks were treated as separate "companies."

Capitalisations were as at August 10 but there would be little change to the position since then, irrespective of the sharemarket's daily fluctuations.

Share prices, capitalisations and their relationships to each other tend to move together and changes in a pool of 127 companies would have little impact on the total situation.

The table shows half the total number of companies, 64, accounted for only 4.29% of total capitalisation. We have to move to 100 companies (78.74% of the total) to reach 20% of the total market capitalisation.

At the other end, 12 companies, or 9.45% of the total, had 61.63% of total market capitalisation at $33.41 billion.

Telecom was capitalised at $13.13 billion, or 24.22%, but that only reinforced the market's lopsidedness. The other 11 companies still had 37.4% of total capitalisation, while accounting for only 8.66% of all companies.

The 22 companies with individual capitalisations of under $20 million each ranged from $600,000 to $19 million and averaged $8.16 million.

Their total capitalisation of $179.5 million can be set against that of one company in the $100-200 million grouping.

Ryman Healthcare had a capitalisation of $180 million, which put it in 44th place among the 127.

Market capitalisation depends partly on the number of shares on issue and partly on the share price, the latter representing several elements of market sentiment.

While a company could have a low capitalisation because it had relatively few shares on issue, its prospects might still be good.

That was beside the point when assessing the attraction of the sharemarket to investors.

A company that had few shares, under one million for example, would have little interest for a larger investor, irrespective of share price, market capitalisation and growth prospects.

Such a company would have dominant shareholders, which adds to risk if an institution, for example, takes a position.

The dominant shareholder issue was relevant to many companies represented in the table, even to those with the top 12 capitalisations.

The latter included Air New Zealand, Carter Holt Harvey, Independent News, Lion Nathan, Natural Gas Corporation, Sky TV and United Networks, all of which had one or more major shareholders.

Those seven companies, plus others with capitalisations of more than $200 million, account for most sharemarket action but the total is only 43 companies.

That does not mean companies further down the capitalisation scale are poor performers. It means market makers and movers, particularly local and international funds, are unlikely to fight for stock.

It is no reflection on listed companies to say if 40 or 50 companies were removed from the list there would be a disproportionately small impact on daily share trading.

The Stock Exchange runs the sharemarket and seems to have trouble recognising a key issue arising from the market's structure and its own activities.

The exchange is not only a big fish in a small pond, it is the only fish. Bigger ponds have bigger fish and few of those fish would want to get into the small pond, even to eat its sole fish.

Neither the exchange, nor any PR operation, can escape that 64 of 127 stocks last week accounted for only 4.29% of total market capitalisation, or $2.32 billion of $54.21 billion.

Sharemarket capitalisation statistics

Capitalisation millionNo of companies% of totalTotal capitalisation $m% of total
Under $202217.32179.50.33
Over $400010.7913,130.424.22

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