Every Dog Has its Day? Thoughts on the NZ sharemarket.
The NZ stock market may have performed poorly over recent years, but it's a bit harsh calling it a dog.
Wednesday, May 10th 2000, 12:00AM
In most developed economies, the main national stock index is taken as a snapshot of the vigour of local capitalism. The New Zealand market’s failure to track post-1997 gains in many world stock indices has raised questions about the relative dynamism of our companies. Commentary relegating the SE-40 to "dog" status may be too harsh.
The old song title, "Nobody loves you when you’re down and out", could have been written about the media’s attitude to the NZ stockmarket in the last two years. While some analysts have been at times upbeat on individual domestic stocks and even sectors, it has been rare for a published columnist to endorse the market as a whole. The reason, of course, has been that our market has gone sideways while major world markets have soared. Being rational folk, the commentators have canvassed a vast selection of plausible root causes for the perceived market malaise.
These include poor management and destruction of shareholder value in some larger corporates, the low inclination of New Zealanders to save outside their housing commitments, no take-over code to protect small investors, the election of a "neo-socialist" governing coalition, the lack of domestic high-technology stocks, and the heavy weight to commodity producing companies listed on the market.
In a purely rational sense, all of these factors could support the canine diagnosis of the market. Yet, these factors and other worse ones have been present in many world markets at other times in their history - remember S.E.Asian emerging markets in the mid ‘nineties? Poor diversity of underlying industries, questionable management, low transparency, and a constricting debt burden may be no bar to strong sharemarket performance, if sentiment is positive and the market is in fashion. The vagaries of investment fashion, known to analysts as "style-cycle" or "growth-value" investing, may be more to blame for the recent NZ market drift than any fundamental or structural weakness in the listed domestic corporate sector.
The history of global sharemarkets in the period since the late-1997 Asian economic crisis has presented a triumph of growth stocks. These are the companies that are considered to be best exposed to surges in global economic momentum, and are often also smaller, innovative firms or those exploiting new technologies and trends. The relatively-new Internet sector, and its information technology infrastructure brethren, were perfectly positioned to take advantage of the special conditions of low interest rates and high consumer confidence and spending which set in from 1998. New Zealand companies simply missed the internet boat -as shown by the fact that our first domestic Internet Public Offering occurred in the last week of March this year.
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Is this cause for despair? Not really - the economics of e-commerce inherently favours countries with large domestic product markets such as the US and Japan, where efficiencies in distribution can be rapidly realised. Moreover, it is arguable that the global market valuation of tech. stocks has become grossly inflated, and NZ has merely missed out on the dubious pleasures of a stockmarket bubble. As the domestic economy presents profitable e-commerce opportunities, no doubt the sector will develop here, as Kiwis are highly "wired" by global standards with a high percentage of the population owning PCs and connected to the Net.
Perhaps the fairest criticism of the domestic corporate sector is that the focus is too often on cost-cutting and not often enough on revenue growth. Internationally, the prime vehicle for growing revenues and profits is acquisition and merger. Increasingly such mergers are paid for in the stock of the acquiring corporation, which is usually running high when expansion plans are hatched. NZ corporates tend to be more conservative, and are frequently unwilling to pay over-the-odds to increase their customer base or create a new conglomerate spanning two or more industries. This makes for less spectacular and exciting performance in the short-run, and for better or worse NZ management seems more risk-averse than overseas counterparts. It could well be the psychological legacy of 1987.
Looking at the graph below, it is clear that the broad NZ share market does from time to time significantly out-perform the global indices. Bear in mind that the post-1997 surge in the cumulative value of International Equities also reflects the 20% fall in the value of the NZ dollar over the period. The 1980-87 and 1994-98 periods saw NZ cumulative returns in excess of global equity performance. The real surges in NZ performance are found during windows of one-to-two years duration, which is not all that different to how Emerging Markets behave. We believe that it would go against the pattern of market history to write off the NZ sharemarket’s chance of a repeat performance.
Greig Fleming is the Research Manager Derivatives, WestpacTrust Investment Managment-NZ-Limited.
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