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New Zealand part of Australia? No way cobber

many investors now are starting to consider Australia part of the local market when it comes to equities allocation. Fisher Funds Management managing director Carmel Fisher disagrees.

Thursday, November 25th 1999, 12:00AM

by Philip Macalister

-It started with the shopping, the housing and the weather. Now it’s spilled over into almost every sporting field New Zealanders hold dear. Australia reigns supreme. So why doesn’t the New Zealand share market admit defeat and merge with Australia to create a supreme Australasian share market?


We’ve heard compelling arguments about the smallness of the New Zealand share market and its poor performance relative to international share markets. We’ve been told that international diversification is necessary to provide New Zealand investors with access to exciting sectors and industries not represented on the New Zealand share market.

But surely there has to be more to it than that?

The discussion needs to be broken down into two parts. First, we need to ask whether international diversification is good and appropriate for New Zealand investors. Then we need to establish whether the Australian share market is the answer.

The New Zealand share market has had a tough time in recent years. Since 1996, the New Zealand market in US Dollar terms has dropped about 10% (mainly due to the 25% fall in the New Zealand dollar), while the world market has risen 60%. Much of the damage was done in 1997/8. In the year to August 1998, the New Zealand market dropped 40% in US Dollar terms, while the global markets stayed relatively flat.

The natural response has been for New Zealand investors to move money from New Zealand assets in favour of international assets. This is not a new phenomenon. International diversification has been embraced by New Zealanders during the past decade to the extent that we have seen New Zealand fund managers move their asset allocation from an average 15% invested in international equities in March 1989 to 29% in March 1999. Some of this increased allocation has been at the expense of New Zealand shares which have fallen from an average 28% of a balanced fund in March 1989 to 22% in March 1999. A recent survey from AON Consulting confirmed that total international holdings (shares and bonds) of New Zealand fund managers are now at an all time high of 39%.

There is no doubt that exposure to different countries, currencies, sectors and companies can add significant value to an investor’s portfolio and reduce the volatility of returns. The only caveat that requires mention is that international diversification works best when there is a low correlation between markets. In the case of the New Zealand market, the relatively high correlation between New Zealand and US shares (particularly during negative periods) reduces the benefits of international diversification to an extent.

International diversification should be pursued to add value and reduce volatility within an investor’s portfolio. It is a less robust argument that international diversification should be undertaken because one’s home market is small or frustrating or a poor performer. These arguments can be easily countered with evidence of individual stock performances, or periods of market outperformance. For example, an investor would find the fact that the New Zealand share market comprises just 0.2% of the world’s market capitalisation irrelevant of his/her New Zealand portfolio had significantly increased in value in the previous year.

Assuming international diversification is appropriate, should New Zealand investors achieve it by adding Australian shares to their domestic portfolio? The Australian story is compelling, and unfortunately New Zealand looks pedestrian in comparison. Not only has there been a constant stream of good news stories about the Australian economy, but also its share market has evolved over the years from a commodity-based market to become a truly rounded market. The absence of any lasting effects from the Asian crisis has been an important factor in changing perceptions about Australia.

Because of the CER relationship and the increasing importance of Australia as a market for many New Zealand companies, it is easily argued that our two sharemarkets should be joined. Such suggestions have been further fuelled by a number of New Zealand companies seeking an Australian sharemarket listing and moving their headquarters to Australia. But doing business with a country and merging our sharemarket with theirs are two different matters.

International diversification can be readily achieved without adding Australian shares to a New Zealand portfolio and calling it domestic equities. The argument in favour of Australian shares centres largely on the closeness and familiarity of the New Zealand and Australian economies and peoples. In addition, the Australian share market is bigger and more diverse than New Zealand; many local sharebrokers have Australian offices and can easily provide research and trading opportunities in Australian shares; and many fund managers have Australian colleagues who can manage Australian portfolios or provide advice and information.

But why limit the discussion to the Australian share market? Just because it is close and easy to get to? Why not consider merging the New Zealand share market with Japan or the US? Japan is a bigger market, more diverse and represents approximately 13% of New Zealand’s exports and imports. The US sharemarket is huge, successful and provides exposure to some of the more exciting sectors for the next century, and the United States represents approximately 15% of New Zealand’s external trade.

Granted, a merger of the Australian and New Zealand share markets would provide new opportunities and exposure to sectors such as banking and resources, but it is not reason enough to lose our national identity.

Would New Zealand companies benefit from a merged Australasian share market? Australian investors can easily invest in New Zealand shares now, and research on New Zealand companies is readily available through Australasian share brokers. Some of the bigger New Zealand companies would be elevated into an Australian index and would therefore attract buying support from those Australian investors who use benchmark indices to determine their stock selection. But the majority of New Zealand companies would be consigned to small-cap status and be lost amidst the hundreds of Australian companies constantly striving for attention and capital from Australian and international investors.

New Zealand investors might benefit in that there would be a greater number of stocks to research, and they would have something other than Telecom and the forestry sector to talk about. However, given the high correlation of both the Australian and New Zealand share markets with Wall Street, a merger between the two markets would afford little protection in the event of a Wall Street collapse.

The New Zealand share market has its own identity in the eyes of international investors. Even though they might only allocate 2% (or more during bull markets) of their international share portfolio to New Zealand, they treat it as a distinct market and pick a handful of New Zealand companies in which to invest. They take the time to visit companies of interest and many treat them as long term investments. If New Zealand were lumped in with Australia, few of our companies would get a look in.

And of course, giving our capital to an Australian company to grow its business could mean creating or building a competitor for a New Zealand company. We object to the idea of foreigners owning our companies, yet we are hesitant in supporting them ourselves.

Sometimes we need an outsider to remind us how good things are. International investors increasingly recognise the value of the New Zealand share market and are simply waiting for a catalyst to prompt buying activity. One international fund manager suggested that with Asian markets up between 25% and 45% in the past year, the New Zealand market looks cheap. "Better undervalued and overlooked than overheated and pricey."

When the All Blacks lose a major test series, we don’t suggest they merge with the Wallabies. (Well we might, but we don’t mean it). Why merge the two sharemarkets just because New Zealand’s performance has been disappointing? Change the coach, pay the players less (well, not all of them!), and encourage New Zealand supporters by all means. But hand it to Australia on a plate? No way cobber!

Carmel Fisher is managing director of Fisher Funds Management.

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