Silver lining in the Land of Mordor

The Kiwi stock market returned 25.1% last year, with companies raising more capital proportionally than any other Asian market. It''s a message the NZX is spreading north to Asia.

New Zealand has had a remarkable turn around in fortunes in the last five years, transforming from a fixed-rate agrarian economy to one where the stock market has doubled in size in two years and where corporate investment is booming.

The discount that stock investors once applied to the market for being a risky far-flung country has evaporated, and those without exposure to the benchmark NZSX50 index missed out on a 25.1% return last year.

By December, the market capitalization of the NZX had reached NZ$63.8 billion ($45.6 billion), nearly 22% higher than December 2003. Trading volumes for the same period were up 10% and the value of trades was up 12%.

Much of the success has been attributed to a privatized and revitalized exchange run by part-owner and chief executive Mark Weldon. Weldon has injected an entrepreneurial spirit into the exchange and has instituted new rules governing listings, broker membership and disclosure that have given investors confidence.

The reforms are attracting a lot of new companies to the main board. Last year, 16 new companies floated shares - making it the best year for IPOs since the early 1980s. As a percentage, companies raised more capital on the Kiwi market than any other stock exchange in the world, except Mexico. Notable listees included logistics company Freightways and children's clothing retailer Pumpkin Patch.

There were also four smaller companies that floated on the secondary alternative board, the NZAX. "This is a pleasing development given that for a long time the capital markets had failed to provide growth capital at a reasonable cost," says Weldon.

2004 brought a long overdue reduction in brokerage fees as firms competed for access to NZ$528 million ($377 million) worth of new money injected by the government through the Cullen Fund - a quasi-pension fund set up by the Finance Minister to meet the cost of future retirement payments. "The Cullen fund has brought a steady flow of new money to the market which is improving liquidity," says Weldon. "It has also put pressure on commission rates for brokers, which have historically been higher than in other markets."

Weldon is keen to attract more interest from Asian institutional investors, even though about half the market is already owned by foreigners, mostly Australians.

He says the exchange is still formulating a strategy for tapping Asian investors, but says he has received good feedback about new continuous disclosure rules. "When fund managers in Asia and the US look at investing in New Zealand they want to know that all of the necessary corporate governance boxes have been ticked, and under these new rules, they have," he states.

Two new initiatives now being pursued are a standardized settlement time of T+3 and a centralized clearing house for all trades.

Weldon has surprised markets with his forward-thinking statements about co-operation between the New Zealand and Australian exchanges, saying that the NZX and the ASX should be able to operate in each other's markets without the need for relicensing. This would make dual-listings redundant.

"Over time, I think the two markets should be increasingly integrated," says Weldon. "We have the same corporate governance rules, similar securities acts and we are close to having mutual recognition of securities offers through the same prospectus, so why shouldn't we be able to operate in each other's market?"

Meantime, the NZX has a healthy pipeline of new listings lined up for 2005, including an IPO for electricity and gas distributor, Vector, which is likely to raise NZ$500 million.