3 May 2019
On the 23rd of April, the NZ share market index (S&P/NZX50) broke through the 10,000 level for the first time in its history. But a quick look back through the major headlines around that day suggest we were more focussed on weather forecasts for the upcoming holiday period. To us it’s simply puzzling that this major milestone wasn’t more widely recognised, acknowledged and even celebrated. One possible answer is that Kiwis and the media simply aren’t aware of, or focussed on, the continued strong performance of our local share market. Our concern here arises from the missed opportunities for New Zealanders to grow their wealth that this lack of awareness implies. We readily celebrate sporting success but seem reluctant to acknowledge business or financial success even though it is critical to our long term wellbeing as a country.
To put some context around the 10,000 level, it’s worth looking at the performance of our local market relative to its international peers. Since early 2009, essentially the end of the GFC, the S&P/NZX50 Index has rallied 255% (122% from capital growth and 133% from dividends). This is an impressive number in isolation but when we compare this performance to other markets, it warrants particular attention. Over the same time period, for example, Australia’s S&P/ASX200 has delivered a more modest return of 176%. Perhaps even more importantly from a New Zealander’s perspective is the comparative returns that have been achieved between our local stocks and our local residential property market. Since January 2009, the S&P/NZX50 has outperformed the residential house price index by a massive 167% (255% vs average house prices rallying 88%). Even if we start this analysis back in 2001, local stocks have again been the winner delivering a total return of 438% against a house price index which is up 264%.
The frustrating aspect of this local bull market is that our domestic “Mum and Dad” investors have not enjoyed the benefits of it to the extent that they could have. Foreign ownership of the S&P/NZX50 has been strongly increasing since 2015. At that time, 45% of the index was foreign-owned whereas today, non-domestic interests control 54% of the stocks on our exchange. During this time we have also seen the level of retail ownership fall steadily. In 2015 it was at 27%, but today this number sits at only 21%.
Again, we feel that there are a number of factors at play in explaining these trends. The high dividend yielding nature of the NZ stock market (currently the S&P/NZX50 Index has a gross dividend yield of 4%) has caught the attention of foreign investors who are looking to offset a lack of opportunities to generate income from their investment portfolios. Remember this is a world where about one third or US$11 trillion of government bonds offer a negative yield! We’ve also seen strong earnings growth from businesses as GDP growth around the world has averaged above 3%p.a. over the last decade and inflation has all but disappeared.
While in the 1980’s and 1990’s NZ’s stock market represented the Wild West of the worlds’ financial markets, over the last 20 years serious financial regulation has transformed the NZ Exchange into a well regulated market that domestic and global investors can have confidence in. The robust regulatory framework in New Zealand and the creation of the Financial Markets Authority have added greatly to the integrity of our capital markets. In our view, the potential for risks and returns to be misrepresented by financial service providers has reduced considerably relative to where we have been in the past.
It’s also worth reflecting on some of the local success stories that our stock market has produced. Xero and TradeMe are a couple of well-known names which have been extremely productive opportunities over time for our retail investors to benefit from (Xero rallied 3,900% from 2009 until it’s delisting from the S&P/NZX50 in 2018 whilst Trade Me generated a return of 180% for investors from its IPO in late 2011). A2 Milk in particular has been a spectacular success, growing from a very small company into a $12 billion business over just a few short years. Its stock price has reflected this success rising from 4 cents per share in 2005 to over $16 today.
We have also seen a number of our infrastructure assets brought to the market by the Government as they have sold down their ownership of state-owned enterprises. Although the partial divestment of companies including Meridian Energy, Mercury Energy, Genesis Energy and Air New Zealand during 2011-2014 was the focus of much political debate and commentary, the outcomes for New Zealanders (both investors and the public) have been very positive. As highlighted in the TDB Advisory Review of the Mixed Ownership Model last year, the performance of these companies largely improved as evidenced by their earnings growth, dividend growth, return-on-assets and levels of debt. Tax payers have received more in dividends from partial ownership than they ever would have had the companies remained fully in Government hands. Through their successful offer our international reputation as a country which offers investment opportunities that are well governed, transparent and financially stable has been enhanced. These qualities should appeal to all investors.
Our capital markets play a hugely important role in the healthy functioning and growth of our economy. For this contribution to be fully realised, markets require strong engagement from a broad range of our domestic investors and institutions. As we see it, this requirement is simply not being fully met. In part we think that this is explained by a disproportionate focus on property investment as a savings mechanism by retail investors. While we accept that property has a valid role to play, we do feel that this current over reliance on a single asset class risks creating a lack of diversification and with that potential consequences for the long-term financial security of retiring New Zealanders.
It’s unlikely though that the attraction of investment properties is the sole factor which explains the poor engagement with our capital markets; a lack of understanding and confidence in shares and bonds is likely to be equally as significant. While the advent of KiwiSaver over the last decade or so has helped on this front, there is much more progress to be made yet. Hopefully financial awareness will increase in line with KiwiSaver balances.
So where to from here? As an industry we are currently engaged in a review of our Capital Markets together with the NZX and the Financial Markets Authority. We have been charged with identifying strategies which will encourage retail investors to increasingly consider the New Zealand share market as a viable and attractive investment option, and for private businesses to consider a domestic listing as a credible path to fund their growth. The success that the S&P/NZX50 Index has enjoyed over the past 20-years should play an important part in developing this solution, but this message of success needs to be heard, understood and even celebrated.