On the Money: Labour meddling puts sharemarket at more risk than dodgy accounting

By Michael Coote

Friday 19th July 2002

The shape of the post-election sharemarket bears some consideration as the end of the September financial year approaches for many local listings.

Most investment commentators have assumed that the likely re-election of a Labour-led government of some form will mean business as usual with few changes to economic settings looming of concern to investors.

Such assumptions could be proved wrong for a variety of reasons.

Internationally, the malaise of confidence in the US sharemarket does not appear to be abating and if anything is spreading, with questions now increasingly raised about accounting practices and corporate health in Europe.

Enronitis is apparently a communicable disease. Loss of confidence in foreign sharemarkets previously thought to be the best in the world shows no obvious end in sight and at some stage should rub off onto local equities.

Worries about Tranz Rail's accounting treatment of expenses and shrivelling profitability may not be the end of the matter for New Zealand listings.

The Australian sharemarket, linked with New Zealand's in the minds of overseas investors, is already flagging even though the outlook for the economy over the Tasman is better than that for our own.

Some commentators are prognosticating possible recession for New Zealand in the second half of 2003.

Should their predictions start to gather increasing certainty it is unlikely local shares will escape unscathed. Nervous investors will sell off shareholdings in advance of bad news coming through.

Increased costs to businesses already imposed by the Labour-Alliance coalition are likely to intensify as new policy initiatives come on stream post-election.

Every increase in costs created through growing red tape or labour market rigidity or unrest represents a loss of profits for companies to reinvest in themselves or pay out to shareholders as dividends.

The same applies to higher tax rates on businesses here compared with their competitors operating in other countries such as Australia. Opportunity costs due to ideologically driven government policy will mount in cumulative effect.

This effect is most likely to be regressive on smaller companies and should be evident in the performance of the small cap stocks on the NZSE's main board and its New Capital Market listings. Small may not be beautiful under such circumstances.

Another questionable practice that could influence sharemarket behaviour is when it is perceived that risk is being shifted from shareholders to taxpayers by a government willing to intervene to correct what it sees as market failings or to maintain supposedly essential services.

The precedent was set by Air New Zealand's bailout, which was not necessary to prevent the collapse of our air travel infrastructure - which was soon enough competed for by Qantas and Virgin Blue - or justified by the obsolete notion that countries should preserve a national carrier.

Now it appears Tranz Rail may be bailed out by the renationalisation of its tracks. It is not necessary that the taxpayer should repurchase railway lines from a failed business whose capital structure has been riddled through like a Swiss cheese by privileged former shareholders.

The lines could perfectly well be tendered off in part or whole to interested parties in private enterprise, such as exporters in the forestry or agribusiness sectors whose shareholders otherwise would benefit from corporate welfare courtesy of captive taxpayers forced to foot the bill as they did for Air New Zealand.

Transportation infrastructure is not a sacred cow. It can be run as a business by businesses that need it and rented out to other users through tolls or contracts.

Forestry companies like to harp on about the lack of suitable road or rail infrastructure to shift the upcoming glut of timber they themselves planted or purchased and are now trying to foist responsibility for shifting on to taxpayers.

Let them buy that infrastructure and improve it at their own expense as was done in the 19th century before the ruinous craze for nationalisation helped usher in our "socialism without doctrines."

The perception that the government will come to the rescue will encourage companies to take risks without bearing commensurate responsibilities so long as they can paint themselves as essential industries.

Share prices of the likes of Tranz Rail and Air New Zealand have rebounded on the perception of some form of government support instead of reflecting genuine increase of productivity and shareholder value.

Softer monetary policy could also come to the rescue of listings that have seen their real prospects decline but which can present nominal improvements in return through the accelerated decay of the value of money.

It may be that our sharemarket catches Enronitis from the state through inflation and nationalisation cooking the books. Who needs crooked accountants with a friend like that sort of government?

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