Opinion: The NZSE - A Dying Exchange?

By Ben Dutton, ShareChat Publisher

Wednesday 24th October 2001

The New Zealand investor community is facing a crisis of unprecedented proportions. The main bastion of capitalism in this country, the New Zealand Stock Exchange, is dying in front of our very eyes. But instead of a call to arms and action, we only see inaction and paralysis from the powers that be.

Never before has the precarious state of our stock exchange been more exposed as in the past few weeks. Takeover offers for what are arguably two of our finest listed companies, Frucor Beverages and Contact Energy, are on the table. Should shareholders accept the offers and the companies delist, the NZSE will go from bad to worse.

So what exactly is the problem? Who is to blame? And can the dire situation be improved?

Certainly, times have changed for the NZSE. The Internet and globalisation have smashed down the borders and barriers New Zealand investors previously faced, resulting in the NZSE losing any previous "home exchange" advantage. It is now just as easy for NZ investors to trade on the Australian Stock Exchange or the penultimate smorgasbord of choice, the NYSE and NASDAQ, as on their local bourse.

Coupled with the simplified global investing regime has been a dearth of new listings on the NZSE. In fact, there has been only one proper IPO this year, that of Wakefield Hospital. The other "new" listings were either the result of the Fletcher Challenge breakup process or graduations from the secondary board and New Capital Market.

The reality is that companies are leaving the NZSE rather than joining. Fletcher Energy, Lion Nathan, Nufarm, Montana and soon Baycorp have all either delisted or moved to Australia. The current takeover offers for Frucor and Contact Energy will further weaken the selection of good quality companies investors can choose from.

One can say that the takeovers and company's moving their head office are a natural part of capitalism (the shareholders will certainly not be complaining when faced with tasty returns on their capital). But are these companies being replaced with others? Indeed, what effort is being made by the NZSE to attract new companies and investors to the exchange?

The answer - nothing at all. The NZSE emperors continue to fiddle while Rome burns. Perhaps they are too busy calculating their payouts once the exchange demutualises. Perhaps they think that this Internet thing and the globalisation of the world's equity markets is just a fad that will die away sometime soon. Perhaps they believe some white knight will ride in and forge an alliance that will save the day - even though the ASX has already walked away from a merger proposal.

Certainly, at a time that calls for speedy action we are seeing absolute paralysis from the management of our exchange. In fact, if past comments are read, apathy seems to be the order of the day.

Bill Foster, the NZSE's Managing Director said in the New Zealand Herald that he expected most of New Zealand's biggest companies would take their head office's and primary listings across the Tasman within five years. He also commented that the real test for the NZSE would be to encourage new companies to join the exchange. With one IPO this year, the exchange has certainly failed that test - back to school for Mr Foster.

The easiest way to judge the performance of the NZSE is to look at its counterpart across the Tasman. Here are a couple of facts and figures to digest. As at June 2001 there were 1425 listed entities on the ASX (this figure includes overseas companies and trusts). At the same time on the NZSE there were 130 domestic issuers and 77 foreign issuers (most of which are never traded). Market capitalisation? The ASX clocks in at $747 billion, the NZSE a paltry $44 billion. Number of trades? Almost 13 million on the ASX, 707,000 on the NZSE.

When taking into account the population difference between the two countries (a multiple of 5) it is obvious that the NZSE is drastically lagging the ASX in all areas.

Part of the problem of the NZSE has been the ownership structure. As the exchange is owned by its members, the focus has been on cost minimisation (and therefore greater returns for its members) as opposed to growth and expansion through marketing and promotional techniques.

Ironically, this strategy has been counter-productive for the sharebrokers who own the exchange as they too require increasing turnover and new issues for the success of their own businesses. Have the brokers shot themselves in the foot through their narrowminded short-term approach? Turnover during the past couple of weeks has been quiet indeed (excluding interest in Contact Energy), a turn of events that may be the beginning of a new downward trend in volume and value as investor interest wanes.

What must the NZSE do to ensure they are not further marginalised and forgotten by New Zealand and global investors?

First, they must conduct an aggressive campaign to attract new companies to the market. New IPOs and listings will develop and maintain interest in the New Zealand market.

Second, they must raise the profile of the NZSE as a vehicle for investing among New Zealand and overseas investors. Helping educate our domestic investors about the stockmarket is also a key area the exchange should be proactive in.

Third, they must give investors access to standard tools available to their overseas peers like market depth and straight through processing which have been promised for years, but never delivered.

Fourth, they must restore investor confidence in the rules and regulations of the New Zealand sharemarket by ensuring fiasco's like the Montana saga of this year never occur again.

Fifth, they must shakeout the current management structure and attract new blood to the exchange - business leaders that are not a member of the old boys club and who will relish the task of taking the NZSE into the 21st Century.

The issue of the state of our stock exchange is one of national importance and should not be discounted. Business leaders, politicians and ordinary investors should rally and cry for drastic change in the NZSE. Without it, there will be severe ramifications for New Zealand business and the country in general. A prosperous exchange will lead to a prosperous New Zealand. Let us not see it die.

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