Opinion & Analysis
The '29 Crash, Depression and World War II caused the greatest destruction of financial and human capital, yet between 1924 and 1946 the British sharemarket returned a positive compound 6.8 per cent per annum.
OPINION: That was better than the 6.2 per cent delivered by the New Zealand sharemarket over almost two decades since 1994.
In preparing a recent newsletter for Infratil's shareholders we looked at reports on other successful investors to see how their returns and approach compared to our own. Helpfully, two British academics had recently released a detailed analysis of the performance of John Maynard Keynes as the manager of the King's College Cambridge endowment fund from 1924 until his death in 1946.
Keynes' 13.7 per cent per annum return was spectacular given the times, but the average British market return of that period was also of interest. It was galling to see that British returns over that period were better than the average return from the New Zealand sharemarket since 1994, which was a period without a market crash, depression or major war.
Our New Zealand analysis started in 1994 as that was when Infratil listed. We also looked at Warren Buffett and the US market's performance over the 22 years to the end of 2011.
The table gives the compound annual returns of the three markets over the three periods. It also shows the compounding effect on a notional $100 investment over an 18.5 year period at the relevant yields.
Given that Infratil has been one of New Zealand's more successful listed companies, we may not be well-positioned to address why others have struggled to provide returns, but there are several obvious factors, one of which is paramount.
There is an inextricable link between investment-earnings-growth-shareholder-wealth-expansion. The poor average returns to shareholders by New Zealand companies reflect weak earnings growth, which in turn reflects a lack of investment. In fact, by one measure the New Zealand market has delivered no capital growth over the last two decades, because all the returns came from dividends.
Why this has happened is not clear. Surveys of companies tend to point to the availability of capital to fund investment, small market size and unhelpful regulation. Financial sector analysts point to the local mania for dividends, which both pressures corporates to pay out all available funds and discourages them from investing in projects that lower the year's earnings in favour of growth next year.
Listening to the current economic policy debate, what stands out is the low priority afforded investment. What apparently matters is whether the Crown should own 51 per cent or 100 per cent of its three power companies, whether the Reserve Bank should intervene to lower the value of the New Zealand dollar, how quickly the Government should get its finances in balance, whether it has a role setting wages, if Chinese ownership of New Zealand land is desirable, etc.
The lack of interest in investment is a message in its own right. It signals a national tendency to seek short-term solutions.
Take the currency debate as an example. Direct intervention by the Government could lower the kiwi/greenback exchange rate overnight, but would carry enormous collateral costs. Increased investment by exporting businesses could lower their operating costs and render them competitive even with a high currency, but would take time.
The sharemarket is not the only way to observe the relative underperformance of corporate profitability in New Zealand. Statistics Department figures show that corporate profit's share of national income has fallen from more than 20 per cent in 2000 to now be less than 14 per cent.
As with underinvestment the factors which have reduced corporate income are complex and contentious. The World Economic Forum Global Competitiveness Report identified key problems with innovation and specifics, such as government procurement of advanced technology. In New Zealand, the Government is perceived to be a relatively negative influence on corporate investment and returns.
The economic forum report ranks Switzerland and the Nordic countries as having the most competitive companies; they all have high currencies, which also avoided the global financial crisis.
It is notable that the financial crisis eventuated because debt was used by people and governments to lift their consumption above their income (corporate debt was not excessive outside pockets such as New Zealand's finance companies and US and European banks).
All solutions now proposed to the consumption imbalances which involve just fiddling with finance are doomed. Direct intervention to lower the New Zealand dollar would be no more successful at generating economic wealth than anything that focuses on more consumption over more investment.
The link between corporate investment and an expansion of national wealth is unambiguous. In the US, Britain and Europe the urgent desire to expand investment has resulted in government agencies buying corporate bonds, pumping funds into banks and promoting measures to encourage bank lending to companies.
It is unclear whether these steps will create value, but given New Zealand's poor investment track record it would seem to be desirable for at least some policy focus on this topic rather than the "symptom issues".
Only increased investment will expand national and private wealth.
- Tim Brown is head of capital markets and economic regulation at Infratil.
- The Dominion Post