NZ sharemarket seen losing critical mass

Friday 3rd December 2010 1 Comment

The New Zealand equity market is losing critical mass and could transition from a slow steady decline to irreversible wind-up rapidly, a stock broker says.

"Left alone, we believe the domestic equity market is likely to decline to a point where its role in the economy is greatly diminished," JBWere Investment Strategy Group analyst Bernard Doyle said in a submission to the Savings Working Group.

The current lack of initial public offers (IPOs) on the sharemarket, waning international investor interest in the market and poor market liquidity are not simply a post-recession pause.

"They are indicative of an equity market in structural decline, which has become self perpetuating," Mr Doyle said.

New Zealand's equity market was close to losing the critical mass required to function as a standalone entity. The transition from slow steady decline to a rapid, irreversible wind-up may prove surprisingly rapid, he said.

Policymakers needed to decide if a domestic equity market was a policy priority, he said.

The submission said the Government could allocate funds from the sale of state-owned enterprises to the New Zealand Superfund and it should recommence contributions to the fund.

The fund's mandate should include taking cornerstone stakes in strategic domestic assets and cornerstone investing in IPOs.

"New Zealand needs to drop the peculiarly New Zealand attitude of not offending the overseas investment community," Mr Doyle said.

The submission argues for strengthened national interest provisions in the consideration of purchases of assets by foreigners. Extra credit could be given to Overseas Investment Office applications that commit to participation in the domestic capital market.

The submission also argues for partial listing of state-owned enterprises and suggests Solid Energy. Sales of state-owned enterprises could offer a discount to KiwiSaver accounts.

KiwiSaver needs an element of compulsion to give the scheme critical mass, Mr Doyle said.

Offshore ownership has been in steady decline in the New Zealand equity market but the dominant trend is a shift of ownership from the listed sector to the unlisted sector.

This has occurred because New Zealand is an attractive destination for trade buyers.

Key to this is the monopoly, duopoly, and oligopoly market structure that is prevalent in our economy. These assets are bite-sized for international trade buyers.

The NZ dollar is a volatile currency and when it is low takeover activity is elevated.

NZPA

Comments from our readers

On 6 December 2010 at 12:06 am Harold said:

Only people with vested interests could possible think that government intervention in markets is a good idea.