Step Three - The Local Markets

Tuesday 29th May 2001

This article takes a look at the practical workings of the New Zealand and Australian stock exchanges and explains some of the opportunities available to the individual investor.

New Zealand and Australian investors mostly invest in their local markets. In Australia it's estimated more than 50% of people have some form of share ownership. This could be either directly or through managed funds or superannuation schemes.

In New Zealand the number of individual investors has also dramatically increased in recent years, particularly with the public offerings of former state or local government-owned businesses such as Contact Energy and Auckland International Airport.

There has also been a government-led push in New Zealand to get people to think about investing for their retirement. With low inflation, domestic rental property as an investment has become less appealing because capital gains are not as great as they once were. This is turn has led more and more people to consider some form of share ownership.

The New Zealand Stock Exchange (NZSE) is a small exchange and is owned by its sharebroker members. At the end of April 2001 it had a capitalisation of $43,789,492,134. Capitalisation is calculated by multiplying the number of shares in each company by their current market value. In other words, if you were able to buy all of the shares in the NZ market at that time it would have cost you about $44 billion.

To compare this with other markets, the Australian market has a capitalisation of A$703 billion. Although Australia is more than 15 times bigger than the NZSE, it is still small by world standards. The New York Stock Exchange has a staggering capitalisation of US$10.6 trillion. To put things in perspective even further it is interesting to note that the largest single company listed at the NYSE is worth more than the entire New Zealand and Australian markets combined.

While New Zealand may be small on a global scale there are still significant investment opportunities locally.

Access to the Australian market has become increasingly easier for New Zealanders recently. Internet stockbrokers allow trading on the Australian markets with relative ease and efficiency. Brokerage costs have fallen dramatically and many New Zealanders have taken the opportunity to invest in Australian companies, particularly via the Internet.

Due to its small size, the NZSE presents investors with several considerations.

The NZSE currently has 215 listed issuers. This means that there are 215 separate companies that investors can buy shares in. This is a reasonable number, however on an average day up to a third of these companies will not trade at all. This means that there are no buyers and sellers willing to trade at anytime during a particular day.

So in reality, we are down to 140 shares that are regularly traded. Of these remaining companies, up to half can be considered "illiquid". This is the term given to shares that are only very lightly traded. This leaves about 70 shares that can be bought and sold with the confidence that there will be other investors who also want to buy and sell.

NZSE statistics demonstrate this clearly, with 98% of the market value contained within the top 40 largest companies. This group of 40 companies is referred to as the NZSE40 and is the most widely used indicator of New Zealand market performance.

Another difficulty facing the New Zealand investor is the issue of market information.

Due to the liquidity problem, the NZSE does not allow "market depth" to be available to the public. Market depth allows people to see the number of buyers and sellers that are waiting to trade shares at each price, and the volume of shares that they wish to buy or sell.

The information, which is currently only available to brokers in New Zealand, can give you an understanding of the current market sentiment and can be useful when executing your own trades. Market depth is widely available for Australian shares, which allows individuals to have more control over their trading decisions.

Due to its larger size the Australian Stock Exchange (ASX) offers more opportunities to invest.

The ASX currently has over 1000 listed companies, of which at least half are sufficiently liquid to easily buy and sell. The ASX as a market has out performed the NZSE for many years and owning shares in Australian companies should certainly be a consideration for New Zealand investors. The ASX itself is a listed company and New Zealand investors are able to buy shares in it.

In 2000 the two exchanges considered the possibility of merging to form a single Australasian exchange, but due to the complex nature of the merger it did not happen. The NZSE is currently planning to demutualise by the end of 2001 and eventually list on its own exchange, similar to the ASX. This may provide an opportunity for the ASX to buy a stake in the NZSE, although there may be certain conditions attached to share ownership of the exchange which will be detailed when it lists.

Many New Zealand investors remain cautious of investing outside of the NZSE. Those that do take the opportunity to explore the ASX and other international markets will be pleasantly surprised that the rules of investing remain the same throughout the world.

You must understand how the markets work, and then you must develop an investment plan that suits your resources and goals and has a level of risk that you are comfortable with.

The next article in this series will begin to explain the different investment strategies that are available to individual investors. The difference between trading and investing is explored, and the different knowledge required is discussed.

This article was written by Nick McCaw from Intelligent Investing

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