Should NZers consider Australia part of the local market Mate?
There is a strong and growing case for New Zealanders to place a greater proportion of their investment assets offshore, and to consider the Australian market as the local market.
Monday, November 1st 1999, 12:00AM
There is a strong and growing case for New Zealanders to place a greater proportion of their investment assets offshore, and to consider the Australian market as the local market.
While sending your money overseas on a working holiday is not a new idea it is one which investors at all levels are starting to embrace. For instance the latest funds flow figures from research house IPAC Securities show that New Zealand managed fund investors have increased their exposure to global equities and reduced their local exposure.
It says that at the end of September there was $1.3 billion invested in foreign shares compared to just $1.1 billion in the local market.
One of the high priests of offshore diversification is Tower Asset Management. Its balanced funds have long been top performers, and it attributes these strong returns to the decision to invest about three quarters of the money offshore.
The reasons behind this decision are simple and logical. The New Zealand sharemarket is small, relatively illiquid, and concentrated in nature.
In total our market makes up just 0.2 per cent of the total world sharemarket capitalisation - hardly even petty cash.
International investors own two thirds of it. That means people sitting in New York, London and Hong Kong are driving the market and their whims and desires may be at odds to those of locals.
The third point is its concentrated nature where the top 10 stocks account for more than two thirds of the market. One analyst has described it as being like a telephone pole - a wooden post with phone lines on top, referring to the dominance of Telecom and forestry stocks.
Tower Asset Management (TAM) investment strategist Tore Hayward says all these factors contribute to the New Zealand market's greater volatility and its poor relative returns.
He says the New Zealand market is 1.5 times more volatile than international ones, and over the past 10 years it has posted an average quarterly return of 1.9 per cent, compared to 3.5 per cent for international markets.
The other sobering fact is that the number of times it has performed five per cent worse than average is (on a quarterly basis over 10 years) 13/40 compared to 5/40 for international markets.
ASB Bank managed fund consultant Richard Flinn says many investors classify New Zealand equities as a separate asset class and have a significant proportion of their investment assets allocated to the country. This situation is exacerbated by the fact that people have capital tied up in their house, and their income is derived in New Zealand.
Flinn says that "on every common sense measure it appears to be an imprudent thing to do."
"The theory of having New Zealand equities as a separate asset class and calling it domestic equities is not taking into account the real world.
"To ask professional investment managers to add significant value in the New Zealand equity market is like putting the All Blacks on a netball court and asking them to play open running rugby."
Why do we want to be one with Australia?
FOR: The reasoning behind this proposition is two-fold. The main reason is that the two economies are quite inter-related at an economic and a corporate level.
Australia is our biggest trading partner and the destination for more than half of our exports, and under CER it is hardly considered a foreign destination. Also many New Zealand businesses believe that if they are going to compete successfully in the global market place they have to have an Australasian base.
Alternatively some companies, such as chemical maker Fernz, have outgrown the New Zealand market and are in the process of shifting its home to Australia.
Likewise Australian drinkers are doing more than just drinking our beer across the Tasman, they are brewing it. These days Kiwi brewer Lion Nathan has the majority of its assets in Australia and earns the bulk of its income from that market.
This integration of the two economies has grown to the stage now that more than 60 per cent of New Zealand's sharemarket capitalisation in made up of stocks which are listed both here and in Australia, and it seems to be growing by the month. Besides Fernz; Evergreen Forests, Baycorp and Montana have all recently announced their intentions to dual list.
IPAC Securities general manager David van Schaardenburg takes the argument a little further and says that investors have a greater choice and diversity of information of companies and sectors when the two countries are looked at as one.
Examples of this are with aviation, where instead of just having Air New Zealand there is the option of buying into Qantas. Telecommunications is another one. Telecom used to be the only choice; now there are the likes of Telstra (which many investors have preferred) and AAPT.
While it takes a bit more time and effort to analyse the combined market the problem is made easier because most of the sharebrokers operate in both countries.
Many fund managers have adopted the proposition that Australia and New Zealand are one market. In recent years New Zealand Funds Management, Coronet, Calan, Colonial First State and New Zealand Guardian Trust have all changed their investment mandates to a down under focus.
AGAINST: Not all professional managers buy into this proposition though. Tower Asset Management, which has been providing investors with good returns over a long period of time agrees with the globalisation theme. In fact much of the returns it has produced have been sheeted home to its early adoption of offshore diversification.
"Our proposition is that New Zealanders should view global shares as their market," investment strategist Tore Hayward says. "Why look at Australia? Your market is global."
TAM's view is that three out of every four dollars should be invested offshore.
That could be considered a generous allocation given that New Zealand makes up a negligible amount of the world market.
Hayward says if wasn't for New Zealand's imputation tax credit regime the mix would even more strongly in favour of offshore assets.
"Without imputation credits it would be very hard to argue owning New Zealand shares," he says.
As for marrying Australia and New Zealand into one market he doesn't buy it.
While there is a tax advantage for New Zealanders to own local shares, there is a disadvantage to owning Australian shares, namely franking credits. Dividends from Australian companies have franking credits (which are like imputation credits) however they can't be used in New Zealand.
On the size argument Hayward says even by combining the two markets they still remain tiny on a global scale.
"You have to question how much you put into such a small microcosm."
TAM's answer is that of the three dollars which goes offshore, only about 2 per cent of that goes into Australian stocks.
Hayward says the fact that the two economies are so intertwined is almost an argument to diversify into other markets, as opposed to buying in.
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