[ Last Updated 22 October 2009 ]
Short Description
The Capital Market Development Taskforce asked Grant Andrews of NZIER to draw together what we know about skills and talent in New Zealand’s capital markets.
Summary of Skills and Talent in New Zealand Capital Markets1
The performance of capital markets depends to a considerable extent on the skills and talents of the people working in the markets. The Capital Market Development Taskforce asked Grant Andrews of NZIER to draw together what we know about skills and talent in New Zealand's capital markets.
He set out to answer the following questions:
- How critical to the operations of capital markets are the skills and talents of the labour force?
- Are there sufficient people employed in the capital markets labour force, and do they have the ‘right' mix of skills to sustain current levels of market activity?
- What paths might the capital markets go down in the next 5-10 years? What would this mean in terms of the number of people needed, and their skills?
- Would we describe the future prospects for the capital markets labour force as presenting a series of problems or opportunities?
Why are People's Skills and Talents Important in Capital Markets?
Capital markets are generally labour-intensive, which pushes up transaction costs. These costs vary, depending on the level of customisation and complexity required. Transactions in private markets tend to have the most customisation and highest transaction costs; public markets will tend to use standard instruments and have lower transaction costs.
Human capital in capital markets is key, as other inputs are non-specific, readily replaced, or readily available. This means that the critical factor in the effectiveness of capital markets is the skills of its workforce, in particular, people's ability to apply, modify and develop intellectual property embodied in financial instruments to local requirements.
Key Features of New Zealand's Capital Markets
Small Scale of Market
New Zealand is characterised by a relatively high proportion of small and medium-sized enterprises compared to other OECD nations. This has resulted in just a small pool of larger firms who can effectively use capital markets. Smaller businesses tend to be funded through personal savings, bank borrowing and retained earning. This means that the local capital markets are inherently small and thin.
Globalisation
The New Zealand financial industry is well connected globally, and able to access global capital flows and financial technology. However, it appears that the New Zealand economy and our financial markets may not be well understood internationally. Our small size may mean that there are weak incentives for foreigners to invest in information about this country. Therefore, an information asymmetry may exist between people in the local industry and their global counterparts.
The labour market for finance professionals is also highly globalised, with movement of people between markets relatively common. The regular movement of New Zealand finance professionals to other markets suggests their skills are comparable to those of foreign counterparts.
Implications for Human Capital in New Zealand's Capital Markets
There are several ways in which skill issues might be constraining the development of our capital markets as follows.
Global incomes – New Zealand as a feeder to larger, offshore markets?
Incomes for people working in capital markets are a function of the size of transactions undertaken. The relatively small size of New Zealand transactions has resulted in incomes of finance professionals being at the low end of the scale globally (although they tend to earn more than people in many other occupations in New Zealand).
Because of the globalised labour market for people who work in capital markets, the most able Kiwi finance professionals will often be drawn to the challenges and incomes of large offshore markets. The possibility of working overseas appears to be a major attraction to people entering the industry, even if only a small number will achieve it.
This has resulted in our markets having a role as a feeder to the large offshore markets. However, this is not necessarily a problem for the local industry so long as it is acknowledged and accommodated in its strategic thinking. In fact, the global financial crisis could present a short-term opportunity for the New Zealand industry, as job shortages elsewhere have made it easier to retain local staff and attract skilled staff from abroad.
Information provision - Risk that it will fall below a critical mass?
A second issue with a small market is critical mass, especially in information provision. If there is too little information about particular instruments, this reduces their trading volumes and liquidity, and in turn reduces incentives for participants to invest in generating the required information. Moreover, building this function relies on accumulation of skills and experience by the people involved. This takes time to build and can be lost quickly if people leave the market.
Esperance (2009) suggests that at least three analysts need to be actively researching a stock to provide sufficient information to support trading and liquidity. And firms can't justify researching a stock unless trading volume is at least $20 million a year. Only 52 stocks are researched by three or more analysts, with very little coverage outside the NZX50 and little or no research outside the NZX. 2 There has also been a significant loss of local research capacity in recent years with several experienced analysts leaving the industry.
Skilled investors in private markets
Although not strictly part of the human resources of capital markets, it is also important to consider the skills of investors in private markets, as they usually take an active role in the firms they invest in, bringing business expertise, contacts etc. as well as finance. If there is a shortage of business skills amongst investors in private markets, this will limit the number of transactions that can proceed through these markets.
Further Development of the Analysis
A more detailed investigation could include breaking down the different functions performed across different parts of our capital markets, and assessing skill capability in each segment. In addition, further work could be done to assess the choice between "buying" or "making" skills – i.e. whether it is more worthwhile to bring people from abroad or to invest in developing talent locally.