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C & D

What a Year

Once again the New Zealand stock market has performed pretty well this year. During the year there have been several new issues, most notably the very large IPO’s for Mighty River Power and Meridian.

Some people say that these IPO’s have not been successful. The fact that they effectively replaced 49% of the tax payers “book value” with hard currency is a success in its own right. They also did so without scavenging money from other publicly listed companies is also encouraging.

What is really harder to quantify is the actual number of investors new to share market investing. Inevitably, most of the shares are held by financial institutions, rather than the so called mum and dad investors as individually held shares. Given that there are over two million KiwiSaver accounts, over half the population probably has an indirect exposure to either Mighty River Power or Meridian.

In the UK, the IPO of Royal Mail was hailed as a success story, with there being four hundred thousand shareholders. The population of the United Kingdom is in excess of sixty three million people. So the shareholding is held by around 0.63% of the UK population. Compare this to Meridian, where there are around 60,000 shareholders or 1.33% of the New Zealand population.

During the year, there was a marked swing away from higher yielding shares to growth shares. The swing seemed to occur about the end of April. It was not surprising, as equity income funds had produced very good returns over the previous twelve months. In fact they were similar returns to that experienced by the broad market in general. Of course what has happened is that the yields have decreased because the share prices have increased so much that their previous income producing advantage over for example bank deposit rates is diminishing. This then  favours the less capital risk investment.

There seems to be a consensus amongst a number of New Zealand fund managers, that the market is becoming more cautious of the potential political ramifications of a change in government at the next election. If there were to be political interference, the chances are that there would be a major flight of capital away from the New Zealand capital markets. This would be a disastrous situation for the country as a whole.

Billions of dollars’ worth of publicly listed New Zealand companies are effectively held on the government’s balance sheet in the form of the investment portfolios of ACC, and the Cullen Fund. This would potentially impact on New Zealand’s credit worthiness, impacting the country’s cost of borrowings, which could also flow through the mortgage rates that many of us pay. There would also be a major impact on the value of the over two million KiwiSaver investors’ portfolios.

New Zealand share market investors have had a very good run, but the tide could rapidly turn. The markets acknowledge geopolitical risks when investing, something that all politicians should seriously consider.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.