Gareth Morgan, Director of Gareth Morgan Investments
Once financial deregulation descended, NZ’s established capital market structures came under tremendous pressures. We have seen the sharemarket suffer an enormous reversal in value with low prospects of that particular market ever returning to normal let alone show the volume of scrip trading that the mid 1980’s witnessed, remote. Most likely, NZ’s major corporates will move totally to the Australian market where depth is more acceptable, while our market is likely to disappear as economic integration with Australia proceeds. The NZ householder will increasingly be able to trade an international share portfolio rather than be restricted to the shares of NZ companies. With this equity investor no longer a captive of NZ corporates, it is unlikely that there will be sufficient depth in our market to warrant its continuation.
Another lost feature of NZ capital market structures, is the dominant role life insurance institutions played in investment markets. With the removal of the tax preferences that these institutions once attracted, their appeal to householders’ savings has logically evaporated. While the advent of new savings products should still ensure that there will be a role in future for the investment management divisions of some of these firms, these are destined to increasingly become distanced from the insurance business over the next few years. The total capture of savings by the insurance industry will be both less and will nçed to be invested over a global horizon rather than a NZ one in order for the companies to maximise long run returns. This source of capital for NZ firms is permanently diminished.
One feature of the low inflation era is that there becomes a logic in households increasing their savings rate in response to higher and more stable real interest rates. Householders will therefore express a preference for this asset in their portfolio at the expense of direct equity investments that they have made in the past. This suggests that the banks will become more important in funding corporate capital demands not only via loans, but via equity as well. This is a very strong feature of the European and the Japanese capital markets. The higher savings rate will demand that households do have available to them products which offer them access at competitive rates, to the capital markets of the world. The role of the global financial institutions who are able to offer this, will increase in NZ at the expense of our home-grown financial services.
The flipside of the international orientation of the NZ household saver and investor, is that his foreign counterpart is likely to play a markedly more active role in financing NZ capital demands. Already we have seen an increased role of these investors in our capital markets. Their presence will instil a requirement on our firms to offer investment opportunities for this capital that are globally competitive.
The financial deregulatory process is still to have a gigantic impact on the financial demand and supply channels in NZ.