Cullen Address to Stock Exchange Listing Function
Michael Cullen Address to New Zealand Stock Exchange Listing Function.
Thank you for your welcome Simon. I am delighted to be here at this very important milestone for the New Zealand Stock Exchange as it heads off in exciting new directions. I realise that you have changed your name to New Zealand Exchange Limited and your trading name to NZX. I suspect that for some months you will have to say “New Zealand Exchange Limited, trading as NZX and previously known as the New Zealand Stock Exchange. I have to say that three years ago, if I had been asked to speculate on where the NZSE would be today, I would have put the balance of probabilities as it being a part of a merged Australasian exchange.
With the wisdom of hindsight, I am delighted that the prediction could not have been further off the mark (if you will excuse the pun).
Everyone is this room will appreciate the importance of an efficient and reputable stock exchange, but I suspect that for the majority of New Zealanders the exchange is a mysterious – if not suspicious – institution. It is seen as the rich person’s TAB, which the innocent enter at their peril: sharp practitioners ever ready to separate the battlers from their hard won nest eggs.
That perception has to change if we are to realise our full economic potential. We need to increase our national level of savings, and channel that into productive investments that create jobs and incomes and earn foreign exchange. The Stock Exchange is a vital intermediary in that process. Let me put the need to mobilise small savings into context.
If we look at our lives today, our level of material consumption is incomparably higher than it was fifty years ago. I suppose that if you applied any reasonable standard of adequacy, you would have to say that we live in a land of plenty, and we live comfortable lives. Certainly by the standards of the vast bulk of the world’s population, we are among the elite. That doesn’t count for much though. Technology and opportunity have marched on, and other countries are opening the doors for technologically literate, adaptable, hard-working and – I have to say - English speaking migrants: all qualities that many New Zealanders have.
Of course there are many non-financial reasons that make New Zealand the place that people want to live in, bring their children up in and grow old in, but the fact remains that if we are to stay competitive in the global market for skills and talent, we have to match the opportunities and rewards that are available elsewhere.
This means that we have to lift our game, not only to capture the opportunities that are emerging as technology advances and world markets expand, but also to catch up on some of the other developed economies that managed to give us the slip in the last forty years or so.
In order to do that, the government has adopted a growth framework. It has three core elements.
Firstly, we want to strengthen the foundations that are the necessary conditions for successful economic performance in an uncertain and ever-changing world. This means we need sound government finances, a competitive economy, a cohesive society, a healthy and skilled population, sound environmental management, a strong research base and a globally connected economy.
The second element of the framework is that we will build more effective innovation, through a mix of attracting and developing talent, creating new venture investment funds, making better linkages between tertiary institutions, industry and communities and by increasing global connectedness.
Finally, we are developing areas where our natural advantages and aptitudes give us scope to boost growth and innovation. These are biotechnology, information and communications technology and the creative industries. These sector level competencies have applications across a range of industries.
The Exchange is relevant to each element of that growth framework. It is a part of our institutional foundations that are the necessary conditions for an innovative and growing economy. It can facilitate innovation by financing the process that converts good ideas into successful enterprises. It can mobilise capital to take full advantage of the growth opportunities that are being developed.
At a theoretical level we can all sign up to the virtues of mobilising and leveraging the savings of New Zealand householders.
In practice, we are not that keen on investing in shares. The Household Savings Survey carried out in 2001 confirmed what we all suspected anyway: that the houses we live in dominate the asset portfolio of New Zealanders. 36 per cent of the value of the assets of householders is tied up in the homes they live in.
The interesting thing, though, is what makes up the other 64 per cent. Shares account for only 3 per cent of total asset values. New Zealanders have more money tied up in their cars – 4 per cent of assets – than they do on the stock market. There is some money that is indirectly channelled through into shares, or that is invested on the stock market through other avenues. Six per cent of assets are in family trusts, another 6 per cent in superannuation schemes and 3 per cent in managed funds. Some of that money will be invested in New Zealand equities.
That, though, is not the point. The issue is where New Zealanders place what might be regarded as additional voluntary savings. They put it in the bank. There is twice the amount of money in bank deposits as there is invested in shares. They invest in other property. Seven per cent of assets are in rental, commercial or other property like vacant sections.
This survey was done in 2001. There is a possibility that the value of assets held in shares would have declined as a proportion of total assets since then, so the figures I have given you overstate rather than understate the appetite for equity investment.
I suspect that this is an area where the average is not very meaningful. It is like 4’ 11” former US Labour Secretary Robert Reich saying that the average height of himself and 7’ 1’’ basketballer Shaq O’Neill was six foot. It doesn’t prepare you for meeting either. We are reasonably certain that some New Zealanders have very substantial share portfolios. If that is the case, the 3 per cent is not so much an indicator of low density – people holding small parts of their assets in shares – but of low penetration – only a small proportion of the population even thinks about buying shares.
It is important to get a clearer picture of who thinks that owning shares is a rational and routine thing to do. If there are barriers to participation in the stock market that arise because people don’t feel confident about moving into that area, or don’t know where to go to buy shares, or don’t have access to information about investing, or don’t trust the advice they are likely to get, then there is a completely different challenge than if owning shares is a widespread social phenomenon and it is only a matter of lifting the level of participation.
There is no doubt that globally, confidence in the integrity of stock markets has taken a battering. That is not because of the integrity of the exchanges, but because of the behaviours of those who manipulate the information that is fed into the exchanges: inflating revenue, concealing liabilities, insider trading and all of that sort of thing.
The natural reaction of the regulators is to try and close avenues for abuse. This is a very delicate area for the design of policy.
The government has tried to restore confidence in stock markets by working towards an environment of disclosure. In the current climate of distrust, robust rules are absolutely essential. What I am saying is that optimal design of the rules is a huge challenge for all involved in the regulation of share trading.
The government considers that it has got the balance right with the continuous disclosure regime outlined in the Securities Markets and Institutions Bill. We haven’t slavishly adopted the disclosure regimes of other countries, but rather have worked on the specific needs of the New Zealand market while conforming with international best practice.
The key issue is who needs to know what and when. Businesses will always be exploring new competitive options. This may be researching a new product, developing new markets, entering into strategic alliances for distributing products, forming joint ventures and so on. At what point does knowledge of the profit potential contained in these nascent business strategies become too dangerous to be held within the company: when must the company tell the exchange?
The risk is that if disclosure requirements are too severe, the net effect is that the business is really disclosing commercially sensitive information to competitors, rather than relevant information to those who might be thinking about selling or buying shares in the company. The question then is what interest is being served? In normal circumstances, trades in shares take place at the margin. It is a tiny percentage, or more likely a fraction of a per cent of the shares, that are traded on any one day. If disclosure damages the company by revealing its competitive hand to competitors, or suppliers, or buyers, do we really advance the interests of shareholders; specifically of current shareholders in the company, but more generally shareholders who have a wider interest in a healthy stock market?
I don’t want to be misunderstood. I am not suggesting that we can be soft on disclosure. I am suggesting that the rules that we have developed recognise these sensitivities but still impose a presumption of disclosure.
I understand that another way that NZX is responding to this challenge is by creating the Alternative Market or NZAX. The intention is to use this as a sub-market to make public capital raising simple and attractive for New Zealand’s small to medium sized companies and other non-traditional entities that may not be suited to an NZX listing at this time, but need sources of capital to fund and accelerate growth. The AX will replace both the New Capital Market and the Unlisted Facility. The listing rules have not been finalised and they will, of course, require Securities Act approval. NZX expects to have the AX ready for launch in August next year, and we will watch this space, and the detail, with interest.
I am going to return to the observation I made at the start of this address: that three years ago the future of the NZSE as an independent entity was very much in doubt. There were two reasons. It was seen to be a poor performer in global terms, and advisors and fund managers were steering investors towards foreign equities. There is nothing like a small bear market to level up performance. There is nothing like a long bear run to change perceptions of underlying performance.
It is clear, with hindsight, that the performance of the New Zealand exchange was not as bad as the public perception of performance. Firstly, the practice here was to make much higher dividend distributions than was common in other jurisdictions. Total returns to shareholders were higher than appeared from a comparison of index movements which only captured capital value changes.
Much more important, though, was the fact that we did not have a tech stock bubble, and many of the gains of foreign exchanges were simply not capable of being supported by the underlying earnings potential of the shares being traded. Added to that, some the earnings that were being reported were themselves the product of accounting practice, not of commercial performance.
Just as the performance and reputational aspects of NZX have turned around, there is now an improved flow of funds into capital markets. The government has diversified the Government Superannuation and Natural Disaster Funds, and by September the New Zealand Superannuation Fund will be flowing into capital markets. Timing was not the best, and the short-term performance of those funds has allowed political opportunists scope to indulge in uninformed populist rhetoric.
Despite some of the political flak that I have taken over fund performance, I remain convinced that diversification was the right decision and will be vindicated in the fullness of time.
The funds will be invested according to commercial criteria against best practice benchmarks by independent professionals, and will not be the playthings of politicians. I don’t know where the eventual balance between foreign and local bonds and equities will settle, but the funds are an opportunity and the challenge now lies with the New Zealand market to attract a reasonable share of them.
Reputation reclaimed, perception improved and opportunity arising, NZX is now in a fundamentally different and better position than it was three years ago.
It needs to defend that reputation and create products that attract investors so that we can resource more of our investment need out of local savings. I understand that we are about to hear from Mark Weldon about how the exchange plans to meet that challenge.
I look forward to hearing those plans, not just as Minister of Finance, but also as the Minister responsible for three very large funds looking for profitable investment homes!