What the millennium's first decade may bring

Friday 2nd February 2001

PETER V O'BRIEN looks back 10 years and forward 10 years in an attempt to form a long-term investment view

Professional investors probably dismiss people who take a 10-year view of financial assets as eccentric. While it may be justified in these days of fast-moving markets, most individuals look long-term at what is likely to be their biggest-ever investment: house purchase and its financing.

At the beginning of the first decade of 21st century it is worth looking at what could happen over the next 10 years. Such an exercise is obviously speculative, to the point of daydreaming, but that does not detract from the enjoyment of soothsaying indulgence.

The past is the best place to start when looking to the future - on the principle of the old saying about people being doomed to repeat history if they do not learn from it.

Going back 10 years shows how much the international and local political, economic and financial worlds changed in the 1990s. A copy of The Economist, selected at random from 1991, detailed the issues of the day.

Bill Clinton was the governor of Arkansas and chairman of the US Democratic Leadership Council (DLC). He spent time at the DLC's 1991 convention patching up a row with the Democratic National Committee, the party's governing body, after the latter reckoned Mr Clinton was trying to takeover the party.

The Economist thought Mr Clinton's reply to a question about whether he would run for President in 1992 did not sound like a "no." (He said if he did seek the Democrat nomination he would tell his "employers," the people of Arkansas, first.)

Eastern European economies were reported to be facing major problems building market-led economies after the region's "extraordinary" political transformation.

World leaders included George Bush (some things remain the same 10 years on), John Major (who?), François Mitterand (described in the magazine as "still by far the most popular politician in France") and, lest we forget, Jim Bolger, assuming a Kiwi can be classified as a "world leader."

World sharemarkets rose 16% in the three months after the outbreak of the Gulf war, according to the Morgan Stanley Capital International index. The movement was calculated in US dollar terms.

Top performing industry sectors were electronic components and instruments (up an average 26%), banking, health and personal care, drink and tobacco, chemicals, electrical and electronics and airlines.

Individual world sharemarket indices had done well since the end of 1990, although well below their all-time highs, recorded in the excess days of the mid to late 1980s. Comparisons with the situation in late January this year are in table I.

Some things did not change between 1991 and 2001. Drug use among competitors in sporting events is still a big issue, despite current sophisticated detecting procedures.

The Economist reported three teams were disqualified from the world worm-charming championship in Devon, UK. The banned competitors were accused of pouring illegal substances into the ground to "charm" as many worms to the surface as possible.

In New Zealand we had a finance minister declaiming about the "mother of all budgets," a distasteful play on Iraq's Saddam Hussein's reference to the "mother of all wars." We got user-pays chargers for public hospital care, since revoked.

Financial and investment matters included the bailout of Bank of New Zealand, the float of Telecom, a cash issue from ill-fated meat processor Fortex and - even then - proposals for compulsory superannuation.

Changes to New Zealand equity investment since 1991 have been dramatic, as shown in table II, which lists the major New Zealand listed companies by market capitalisation in 1990 with those in late January this year. Similar figures for 1980 were included to illustrate the changing face of large Kiwi companies over 20 years.

At the end of the 1980s and the start of the 1990s the sharemarket was absorbing the effects of the 1987 crash as companies that had tried to hold on gave away to the inevitable, or had the inevitable imposed on them. Excesses were summed up in the words of a company chairman, who told an annual meeting that "in a technical sense" liabilities exceeded assets. It may have been "technical," but in any sense, a company is insolvent when liabilities exceed assets.

Table II's comparative figures for 1980 show, as does relevant information from other countries, that markets were going through a period of relative emphasis on real producers providing real goods and services and earning real revenues from sales, real cashflow and real profit.

The need for much tighter controls over company reporting and wheeler-dealing did not arise to any great extent until the cowboys drove through gaps in regulatory defences.

The size of the companies in each of the three dates taken for market capitalisation disguise the fact that many diversified industrial investment holding companies fell over after the 1987 crash. More than 220 New Zealand-based companies were listed on the Stock Exchange at the start of 1987 but many disappeared in the ensuing two years.

There was nothing new in that. In the early 20th century a combination of a revamped Companies Act, Stock Exchange regulations, a malaise in the goldmining industry and general recessionary pressures resulted in a host of listed mining companies failing.

There was also nothing new in the cowboys of the 1980s. The US, for example, moved against cartels a century ago and regularly upgraded its regulatory processes, culminating in the formation of the Securities and Exchange Commission and the antimonopoly activities of the Justice Department.

There are still examples of shoddy practices in US markets and periodic cases of substantial frauds but the regulatory authorities have the power, and use it, to deal with the excesses.

New Zealand has improved its procedures in recent years but we still lag behind the US. Strange situations still surface here, although not always in the realm of fraud or other sharp practices. Governments, for example, decided to control the potentially monopolistic powers of former SOEs through the provision of Kiwi shares.

The Telecom float a decade ago included a Kiwi share at a time when the organisation controlled virtually all the telephone system. There were inquiries into the electricity and telecommunications industries last year to see whether and to what extent they should be regulated, and other issues will probably surface in future.

The market capitalisation lists in table II show the New Zealand sharemarket has been based on long-established companies, although Brierley Investments was not established until 1963 and Robt Jones Investments was not formed until 1982.

Companies in the January 2001 column could also be described as long-established, with the exception of The Warehouse Group and Sky TV. Telecom, Contact Energy Auckland Airport and Air New Zealand had origins in other commercial undertakings with a considerable background.

There is a widespread view that things will change over the next 10 years, not only in New Zealand, as "new economy" companies come to dominate international and local business, That remains to be seen, because the sharemarket and general trading performance of new economy organisations was not too flash last year, despite solid recommendations from brokerage houses, particularly in the US.

It can be predicted safely there will be changes to the worldwide industrial mix in the next 10 years, just as there were in the past 200, Railways replaced coaches, motor vehicles took over from horses and aircraft came to dominate international travel.

Computers have replaced a wide range of office equipment in a relatively short period and are likely to make more inroads into the communications industry as the internet is developed.

The internet became available for public use only in 1994 and then with modest beginnings. Cellular telephones went from a cumbersome novelty to an everyday device.

The phenomenon of globalisation is unlikely to slow down; many underdeveloped econo-mies, particularly in Eastern Europe and China will affect international business; and there will be greater emphasis on the so-called knowledge industries.

It can be assumed many New Zealand industries and businesses will be under pressure in the next 10 years from developments under way around the world. A small population, distance and an economy still heavily reliant on exports of primary produce or processed agricultural good means innovation will be essential.

One form of innovation is already occurring with some large New Zealand-based companies moving their head offices overseas, Few would have imagined just over 10 years ago the then Government Life Insurance, now Tower, would be looking in 2001 to shifting its head office base to Australia.

They would also have difficulty in accepting that most large New Zealand listed companies would be controlled from overseas, given that only two groups in the 1990 column of table II, Elders Resources NZFP and Lion Nathan, had sizable overseas-based shareholders.

Partial or dominant overseas ownership is now the rule rather than the exception, and overseas institutions and managed funds have increased their holding of New Zealand financial securities. The changes spread to banks, insurance companies and other local financial institutions,

We now are at the stage where a government-sponsored People's Bank is being mooted. It will be interesting to see the structure and health of such an institution at the start of the next decade.

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