Gareth Morgan, Director of Gareth Morgan Investments
The New Zealand economy has been in recovery since 1992 making this one of our more sustained economic upswings already, with it set to post another year or so of growth at least. To a large degree our return to economic growth has followed that in the US which began its 1990's recovery almost a year earlier than us. As in the US the recovery has been pretty employment-intensive with sufficient jobs created to put a large dent in the unemployment rate; in our case reducing it from a peak of over 11% to the current 6½% rate, while in the States a drop from 9% to almost 5% has been recorded. Makes the typical European rates of 11%, 12% and 22% rates in Germany, France and Spain respectively, seem pretty inferior.
But in one respect at least New Zealand's economic upswing has paled into insignificance compared to that of the US – performance of our listed corporate sector. Share prices here have risen some 60% since 1992, while in the US they have lifted 140% since their economic recovery took hold. Even adjusting for movement in the exchange rate, our shares have still only risen 94%, and that was from a level which was less than half of its 1987 peak.
So from an investment perspective, the New Zealand sharemarket has not furnished a great return for savers. Thank goodness then, that we are not compelled to invest in our own companies. That's another thing we have to thank the liberalising policies of 1984 for. Imagine the loss of wealth we might have had to endure should Treasurer Peters' policy platform of severe constraints on foreign capital flows not turned out to be just a pre-election stunt. Not only would his way have meant the denial of access for this economy to foreign capital, but logically it would have required that we all were required to invest in a much-reduced sphere of capital growth activities ourselves, namely those on-shore.
Think also what a compulsory superannuation scheme – that favoured again by Treasurer Peters and supported by ACT – might hold in store. Being a regulated animal, it is of course open to the whims of our elected regulators as they pass through the corridors of power. And goodness knows what the electoral process can turn up – the strangest folks can end up pulling the purse strings. Such a concentration of power as a regulated, compulsory scheme entails is just open to political abuse. We only need to look across the Tasman when, in one of his more asinine moments, Treasurer Keating threatened all those institutions who had been granted licenses to manage the citizenry's compulsory savings, we revocation of their licences if they didn't do what he thought was best – invest onshore in Australia.
On another plane, we should consider why New Zealand listed corporates have not delivered the capital growth one might have expected over this recovery. Again comparison with the US is useful because both economies have been moving in sync pretty much this decade, most recently both having slowed their growth rates over 1996. Firstly, corporate earnings growth in the US is far higher than our own. While our corporates are currently limping in with earnings results which surprise for their weakness, US corporates – also faced with a slowing economy – have been surprising positively with earnings results. The difference on earnings performance appears to be coming for two reasons. The US has a far more diversified corporate sector which is leading edge in both information technology and it has also made substantial inroads in expanding markets and operations abroad. Coca Cola for instance gets 70% of its growth from outside of the US. What happened to our great global push ? With a couple of notable exceptions it has fizzled – in large part due to the lack of management experience of operating in large, competitive markets. We fall back then on our primary processors and domestic-oriented stocks – one under siege from cramped world prices for basic manufactures, the other from penetration of the home market by imports and foreign competitors.
The second factor which has impinged on our sharemarket's performance, has been the relatively low price we are prepared to pay for our companies. US shares trade at an average of 20 times latest reported earnings, ours at 17. For this we can blame the competition faced from returns on fixed interest here, plus the reticence we investors feel over buying into companies which just do not deliver internationally competitive earnings performance.
Where to then ? Our listed corporates will gradually be faced with a higher cost of capital as the reluctance of investors intensifies. This will restrict their own opportunities to invest for greater competitiveness and growth, and one would expect one or all of the following – downsizing, injection of foreign equity (money and technology transfer), and fierce productivity improvement.
Much of the business earnings growth in New Zealand over the 1990's recovery has been scored in the unlisted medium and small business sector. These firms have proved more adroit at taking the opportunities which rapid and fundamental changes in the economic operating environment have conferred.