Have we learnt nothing from Black Monday?
As tempting as it is, we are not allowed to write about anything to do with the weekends General Election as it risks breaching the Electoral Act – so best not to. And as historic as this election may be – and I believe it is pivotal for New Zealand – there’s another historic moment in time coming up next week: Black Monday being the global stock market crash of October 1987.
Stock markets around the world were giddy in the years headed in to late 1987 primarily fuelled by speculation and huge FOMO. BBQ conversation centred on the next “big thing”, shares and stocks, tips, my broker etc etc. Think the epic movie “Wall Street” and Gordon Gecko’s famous line “greed is good” which I think sums up the mood and attitude of the times. On Monday 19 October 1987 things came crashing down here in New Zealand and around the world as the international markets began trading in their time zones somewhat later than ours.
The New Zealand share market index at the time, the Barclays Index which then became the better known NZSE40, fell 15% in one trading session. Mayhem ensued in the aftermath as share prices collapsed, companies subsequently went broke and people rightfully worried about their livelihoods and futures.
The fallout in New Zealand from the crash was long-lived and its effect was still hanging over financial markets in the early 1990s. NZ entered a recession in the early 1990s as GDP growth went negative for a period, unemployment leaped, interest rates soared and the then National Government walked in to the 1990 parliament to be confronted with a terrible set of Government accounts leading to and necessitating the now famous Mother of All Budgets in May 1990. A lot of this was because of the parlous state of financial markets in the preceding years in the wake of the aforementioned share market crash.
“Those that fail to learn from history are doomed to repeat it” – Winston Churchill.
Well, what have we learned from the late 1980s and early 1990s and how have things changed at least in financial markets?
That period was all about Chase Corporation, Equiticorp, Omnicorp, Brierley Investments and Fletcher Challenge as our leading listed companies. In the late 1980s the international investment banks and share brokers had a significant presence in NZ (I explain why in a second) including boots here on the ground with Merrill Lynch, Barclays / BZW, ABN Amro, Salomon Brothers / Citigroup, Goldman Sachs, Credit Suisse and some of the Japanese banks including Nomura and Daiwa. We had local players including some at least part owned by Aussie parents Fay Richwhite, Buttle Wilson, Hendry Hay McIntosh etc…
Just prior to the October 1987 crash, the level of the NZSE40 Index was 3,798 and by November, the index had fallen 43% to 2,168. Hundreds of listed companies effectively disappeared….
The global were here for one reason only: privatisation following the implementation of what became known as Rogernomics and then Ruthenomics and the resulting bonanza in investment banking fees. Remember the IPOs of Telecom, New Zealand Rail and more. NZ did a slightly better job than Gorbachev did in the former Soviet Union, but only just! We sold assets that our parents through their taxes paid for and we arguably sold them too cheap. Telecom’s issue price was $2.50 and it increased to $10 within a decade for example. We can arguably say the same for gentailers and airports.
Back to learning from history as Churchill said. If we fast forward to today, there are just two international bankers / brokers here, being Australia’s enormously successful Macquarie Group and the Swiss behemoth UBS. Goldman Sachs and Citigroup are scaled down mainly small banking offices with their focus appearing to be big-ticket Government-related banking work if they can get it (Air New Zealand capital raise and the KiwiWealth sale in 2022 for example).
This decline in international participation is really because of the poor overall health of corporate New Zealand and particularly the listed space. We’ve really muddled along to today with some overall comparatively pedestrian business that hasn’t energised / fired-up, whatever you want to call, it the stock markets. Notwithstanding of course we have had some absolute crackers in the likes of Fisher & Paykel Healthcare, Xero, Infratil, EBOS, Mainfreight etc. They are the essentially the Berkshires, Apples, Microsoft’s of the New Zealand corporate sector. We need more though, many more as New Zealand financial / investment markets we now face something of a conundrum.
New Zealand has $100 billion invested in the many KiwiSaver schemes and around $175 billion in other private superannuation savings. This includes the eminently successful New Zealand Super Scheme, thanks to Sir Michael Cullen. And this is growing at around $5 billion each year from new contributions. The New Zealand share market has a market capitalisation of ~$160bn (as a marker the market cap of Apple is NZ$4,670 billion).
In short, we now have a very successful KiwiSaver arrangement that has capital coming into a very small market with persistently very little new issuance (new capital requirements). So where is all that money going to go? Not New Zealand unfortunately as indicated by the NZSS which has (for some time in fact) the majority of its investments outside of New Zealand. The New Zealand capital markets without new listings are going to struggle. NZ dedicated funds will have to shutter as they will be unable to place / invest their inflows. Capital will inevitably / continue to flow offshore. The Aussies will continue to steal our companies by way of attracting their primary listings or takeover. But that’s capitalism – embrace it or die.
Interestingly, the NZX is hosting an industry event in November, following its AGM, and has invited our (Hobson Wealth’s) Head of Investments to present his ideas on how best to develop New Zealand’s capital markets. Having worked in big roles for global investment banks in Asia and New York and indeed Graeme Hart’s US pension scheme which was based in New Zealand, he will no doubt have some strong views and great ideas. Like for example, why doesn’t the NZSX have the top 10 US-listed companies trading in New Zealand outside of US trading hours?
We can and do build some great businesses here in New Zealand, including the likes of Rocket Lab, Zuru, All Birds, Xero, Anaplan and many more. We need the capital to go to them as it does in offshore markets.
The hype and speculation of the 1980s led to Black Monday and the share market crash of October 1987. The shallow corporates at the time here in New Zealand were wiped out while the ensuing years saw a slew of (arguably cheap) privatisations come to the market but also lead to overseas direct investors. Have we learnt from history?