[ Last Updated 21 October 2009 ]
Short Description
These two research papers look at how the structure and ownership of New Zealand companies influences the development of its capital markets.
Summary of The Structure of the New Zealand Economy and its Capital Markets 1
The Capital Market Development Taskforce asked Prof Lewis Evans of Victoria University to look at how the structure and ownership of New Zealand companies influences the development of its capital markets. MED undertook additional research on how the structure and ownership of companies in New Zealand compares to other countries.
How do our equity markets compare internationally?
The study compared New Zealand to a range of small developed countries (Australia, Denmark, Finland, Ireland, Norway, Singapore, Sweden and Switzerland) over the period from 1996 to 2007. The report notes three distinctive features of New Zealand that may impact on the scale and sophistication of its capital markets: New Zealand is the most isolated of these countries in its distance from large markets; it has among the weakest private property protections in the OECD; and New Zealand has little manufacturing and significant agricultural processing.
Amongst the comparator countries, New Zealand had the smallest listed share market relative to the size of its economy. Furthermore, over the sample period, New Zealand’s domestic share market capitalisation shrank relative to the economy, while all but one of the other stock markets has grown considerably.
Prof Evans’ paper assembles a number of other facts about New Zealand’s share market:
- New Zealand did not see significant growth in the number of companies that are listed. The number of new listings per year (adjusted for population) in New Zealand lies in the middle of the group, but has decreased over recent years.
- The value of New Zealand share market turnover relative to GDP is the
- smallest among countries considered, and that has changed only slightly over the
- period, again in contrast to the other countries.
- In all the countries, market capitalisation has become less concentrated in the top ten stocks. But the significance of the largest companies has decreased most in New Zealand, while increasing in many other countries. This indicates that smaller companies are becoming more prevalent in New Zealand’s domestic market. Trading, however, is still relatively highly concentrated at the top end of the market.
- In 1997 New Zealand had the lowest price/earnings ratio (the value of the market relative to annual earnings), but by 2007 it had one of the highest ratios.
- The value of dividends paid relative to total market capitalisation is very high in New Zealand, and this difference from other countries appears to have increased between 2000 and 2006. It is possible that a high P/E ratio along with a high gross dividend yield reflects the dividend imputation tax system, but further analysis would be required to determine this.
Can structural features of New Zealand’s economy explain the small size of our public capital markets?
Compared to Australia, many more of New Zealand’s largest 100 firms (by revenue) are foreign owned, co-operatives or state-owned enterprises. This is a key reason why 75% of the top 100 enterprises are listed in Australia, whereas only 25% are in New Zealand. Another key contributor to New Zealand’s low share market capitalisation is the smaller size of “large” New Zealand firms.
Foreign Ownership
Overall, the proportion of New Zealand firms that a foreign controlled does not appear to be particularly high when compared internationally. But many of New Zealand’s largest companies are subsidiaries of foreign companies, and few of these raise equity in New Zealand. Of the companies included in New Zealand Management Magazine’s top 200, 116 are majority foreign-controlled, and only 14 of these are listed. In contrast, of the 50 New Zealand-owned companies (excluding co-operatives and government-owned companies) in the top 200, 40 are listed on the NZX.
Furthermore, takeover or merger with a foreign company accounts for over a third of companies ceasing to list on the NZX. Data also illustrates that companies delisting for this reason are more likely to be medium or large companies than those delisting because of takeover or merger with another domestic company.
Co-operatives
Co-operative enterprises are common in agriculture and food manufacturing. In New Zealand these industries make up a larger proportion of GDP than in other countries. Co-operatives are, therefore, particularly prevalent here, comprising an estimated 22% of GDP. This has an important impact on our capital markets, as co-operatives are predominantly not publicly listed.
State-Owned Enterprises
An OECD 2005 survey shows that New Zealand does not have an unusual number of SOEs. However, the estimated total value of the equity of SOEs is nearly 10% of GDP - the third highest figure of the ten OECD countries compared. SOEs in New Zealand tend to be wholly owned by the state – partial listings are rare, unlike in many other countries. Thus, they also make up a very small percentage of the stock market in comparison to other countries. Note, though, that SOEs in New Zealand do raise funds from corporate bond markets.
Number and Size of Large Firms
The average size (by market capitalisation) of listed companies in New Zealand is much smaller than in the other countries. What’s more, the average size fell slightly between 1996 and 2007, while it grew substantially in all other countries.
The size distribution of companies in New Zealand is roughly in line with other countries except at the top end. Based on international comparison there are fewer very large firms than would be expected in an economy of our size. For example, New Zealand has only two firms in the FORBES 2000 list of the world’s largest public companies – Telecom ranked at 1575 and Fletcher Building at 1720.2 Their combined market capitalisation equates to less than 10% of GDP. In comparison, Australia has 46 Forbes 2000 companies, and each of the small Nordic countries has at least 10. In all these countries, the market capitalisation of Forbes 2000 companies exceeds 80% of GDP. This illustrates that in some other countries, it is these very large companies that account for a substantial proportion market capitalisation.
Conclusion
New Zealand has an unusually small listed share market as a proportion of GDP and it is not growing as rapidly as markets in other comparable countries. Small firm size, and ownership of our larger companies by government, overseas companies, and co-operative structures may all contribute to the lack of scale and participation in New Zealand’s capital markets.