Investors running out of options

TERRY HALL
Last updated 05:00 25/02/2013

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OPINION: Don't be fooled: many Kiwi investors are finding it tough out there. As the year unfolds, their problems are steadily worsening: the only bright clouds on the horizon are the prospect of the Mighty River and other partial state asset sales.

At first sight the financial markets appear in fine fettle.

The sharemarket is flying high; handsome profits have been made on many stocks. There is little sign of nervousness in the fixed-interest markets after the massive failures of finance and investment companies in the aftermath of the 2008 global financial crisis which took many small Kiwi investors' savings with them.

There have been no nasty shocks in the current reporting round that is now in full swing.

Most companies are announcing profits broadly in line with expectations. Many are lifting dividends. While some results include qualifications, most are reasonably upbeat that they'll do reasonably well for the rest of the year.

The main negative was the failure of Mainzeal, the third biggest builder, which fortunately is no longer listed on the NZX.

While this is terrible news for its sub-contractors and staff, to date this failure doesn't appear to have had too serious flow-on effects to other NZX listed companies.

In a reminder of what a huge company Fletcher Building has become, it announced last week that Mainzeal contractors owed it $7.5 million, money it considered at risk. Not so long ago a possible loss like this would have hurt the share price. These days it is considered chicken feed for a company whose billion-dollar deals in the Christchurch rebuild are helpfully distracting from the weaker prospects in its main market - Australia.

New chief executive Mark Adamson said he was reluctant to pick up Mainzeal's unfinished work because of likely "issues".

Judging from his comments, today's company must be a very different beast to that founded a century ago in Dunedin by a tough Scots migrant, the first Sir James.

My grandfather's building firm struggled to win contracts "against Jim", who was considered ruthless at winning any sort of work. In contrast Adamson portrays himself as being public spiritedly generous to a fault. He says Fletcher's main interest in seeing some of the 40 uncompleted projects finished is to "save the subbies" (who are major buyers of Fletcher's products) and in "some of Mainzeal's 400 staff" (presumably to help Fletcher with the Christchurch rebuild and the projected pick-up in Auckland construction activity).

At first glance, all seems well with the New Zealand investment scene. The strong sharemarket implies there is no lack of confidence or shortage of money seeking investment in so-called risk assets; business surveys are reasonably optimistic.

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The country - apart from the real problems flowing from the high dollar - seems to be coping comparatively well in the post- 2008 environment. Chinese and other trading links suggest New Zealand is particularly well placed for the coming decade, barring unforeseen events.

But a closer scrutiny shows there are real problems.

The key one - which dominated discussion last week with fellow members and advisers of charity investment bodies that I've been involved with for years - is that there is a serious shortage of where to invest.

The country's fixed-interest markets - once considered essential for funding growth and as a good place to invest - are shrinking fast. Companies that used to borrow locally to fund their activities now go to the bank or overseas where they can borrow more cheaply.

This is becoming a serious problem for many charity and other funds that are required to invest in quality rated fixed-interest securities. There is now a serious shortage of new issues, a problem which has been steadily worsening since 2007. Overseas investors are keen to invest here.

We're seen as an attractive destination with highish interest rates by world standards.

Banks, like the ASB, can also borrow more cheaply offshore.

They are tending to repay local bond issues early, rather than reissue them to Kiwi holders at lower rates for another five years.

NZX shares slipped last week after its latest profit announcement. This reported new issues in the capital markets were at the third lowest level in a decade.

Money has to go somewhere.

Many investors, faced with re-investing maturing interest rate securities at much lower rates - with, say, a bank - are switching more money to the sharemarket to get higher returns.

A problem is that today's New Zealand stockmarket is much smaller. Competition from new money - including that from KiwiSaver funds - is propelling share prices up. And dividend yields down.

On some estimates, shares listed on the NZX are now among the most expensive - on fundamental values - in the world.

Many investors are responding by investing more money overseas. Increasing sums are going to Australia. This is a pity: ideally New Zealand investment money should be kept at home to fund new endeavours.

In past years this situation would lead to a flood of new listings on the NZX.

Little is in sight, apart from talk of the float of the Mad Butcher and possibly a Diligent offshoot.

Hence the strong interest in Mighty River.

Contact Energy's better than expected result won't have dented likely demand.

- BusinessDay.co.nz

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