NZ sharemarket's size relative to GDP collapses to just 24% versus Australia's 98%

Foreign ownership of the sharemarket is now 40%, down on where it was just 13 years ago, and the market’s size relative to the country’s GDP has almost halved over the same period.

These are among the key findings of Goldman Sachs’ annual survey of sharemarket ownership, where Goldman strategist Bernard Doyle advocates sales of state owned assets and the introduction of compulsory KiwiSaver as ways of boosting the flagging sharemarket.

Total foreign ownership of the sharemarket now sits at 36.2%, according to Doyle, down from 38.1% last year and way down on the 60.3% peak recorded in Goldman’s first survey back in 1997. Doyle says the fall this year was largely through the selling of several offshore owned strategic stakes in local companies.

Included in this was the Infratil and New Zealand Superannuation Fund purchase of Shell’s New Zealand distribution business which included a 17% holding in the listed New Zealand Refining Company, and the sale on-market of a 13.8% stake in Ryman Healthcare by Canada’s Garlow Management.

At 36.2%, Doyle says foreign ownership of the New Zealand sharemarket is below the 41% offshore ownership of Australia’s sharemarket, but well ahead of the likes of the United States and Japan.

Sharemarket to GDP ratio collapses

However, the size of our equity market relative to the country’s Gross Domestic Product compared to Australia, makes for grim reading. According to Doyle, at the end of 1997 New Zealand had a market capitalisation to GDP ratio of 52%. Although not especially high, this wasn’t too far behind Australia’s rate then of 65%. By this year the gap had widened massively, with New Zealand’s sharemarket capitalisation shrinking to just 24% of GDP versus Australia’s 98%.

Doyle notes that a number of factors have prevented a strong and well functioning capital market in New Zealand. These include a lack of new listings, the under representation of financial and agricultural sector exposures, the skew of tax incentives to property investment and concentration of state owned assets. Goldman Sachs’ findings echo comments from long time market watcher and commentator Brian Gaynor. Gaynor told interest.co.nz last month the New Zealand sharemarket was the quietest he had seen it in 35 years.

Doyle says recent developments leave him “cautiously optimistic” for a capital markets turn-around. These include the Government’s partial removal of a tax-induced bias towards residential property investment after depreciation rules on residential investment property were tightened, changes at Fonterra that will enable investors to tap into the dairy co-operative, and positive regulatory steps including the Government’s establishment of the Financial Markets Authority.

“That said, there remain prohibitive barriers to the development of capital markets within New Zealand,” Doyle says.

“In particular, (these include) the proportion of assets held by the Government that would normally reside in the private sector.”

These assets feature electricity generators such as Genesis Energy, Mighty River Power and Meridian Energy, Air New Zealand and Solid Energy.

'Make KiwiSaver compulsory'

Doyle suggests New Zealand’s legacy of poor savings and its tax regime requires further public policy attention.

“An element of compulsion in KiwiSaver would be a straight-forward way of addressing this.”

At 19.8%, this year’s survey shows KiwiSaver money has already lifted New Zealand managed funds ownership of the equity market to its highest level in the survey’s history. Nonetheless, Doyle estimates only about 13% of the NZ$5.7 billion invested by more than one million people through KiwiSaver as of June 30 was managed within local equities.

Goldman’s overall break-up of sharemarket ownership shows;

Local managed funds holding 19.8%, up 0.7% year-on-year.

New Zealand retail investors holding 23.3%, up 1.6% year-on-year but well down on the 28.4% peak in March 2007 just before the onset of the Global Financial Crisis.

New Zealand strategic stakes down 0.4% year-on-year to 20.7%.

Total foreign ownership down 1.9% year-on-year to 36.2%. This is split between 13.1% held via overseas strategic stakes, down from 15.2% last year, and 23.1% held by “other” offshore owners, up from 22.9%.

A total of 51 stocks were included in Goldman Sachs’ survey, up one from last year.

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