In welcoming you to the 2011 annual meeting it’s instructive to reflect on the changing nature of these annual shareholder forums, as shown by the continuing trends of modest shareholder attendance across the public company sector. It is important that boards present in person, that director nominations and elections take place in an open environment, that shareholders have the opportunity to ask questions in person, meet each other and meet directors and management. Shareholders are after all the owners. Modern communication practices – including investor days, regular communication with the markets via periodic (in NZX’s case monthly) release of financial metrics, continuous disclosure, websites and social media, research, analyst and media calls following announcements, have all meant that the annual meeting’s traditional role as the most important annual data update has declined in significance. There are of course exceptions – where notable or contentious special business is on the table – and where aging icons such as Messrs Buffett and Munger attract cultist followings – but absent some matter of special interest, the general downweighting of the annual meeting as the forum for significant information exchange is a trend that is set to continue. Given the level of operational information that NZX has made public, I’d like to focus this address at the strategic level and on the macro environment – both domestically and internationally. The macro environment is one which we monitor and scenario plan for, but we don’t control. There are elements of it, domestically, that we seek to influence, but can’t control. There are very few influences on NZX’s business that are controllable. We are fortunate in having a chief executive who has a voracious and insatiable appetite for information and knowledge – and that has helped us limit our universe of unknown unknowns, prepare for the trends we have been able to identify early, position ourselves ahead of surprises and be well prepared for the environmental changes that are a constant for us. I am pleased to say that the domestic macro environment is as favourable to NZX as I can remember it ever being. The organization performed strongly last year and is half way through an even stronger 2011. A healthy feeling of optimism internally is matched by optimism externally – borne in part from evidence that the business development and major capital initiatives of the last few years – the clearing house build and launch, and our launch of the dairy derivatives platform, are delivering cash flows and earnings growth. We are still seen as closely correlated to the cash equities market and its order flows: our original raison d’etre – but in fact a business that while fundamental to us, is one which we are less reliant on than ever before. That is a business that globally has seen reducing volumes and profitability from, in part, reduced listings (the number of listed entities in the USA has reduced from about 8800 in 1997 to 5100 in 2009 – a 40% decrease), a difficult capital raising environment and challenges to trading volumes through the advent of alternative trading facilities and off-market pools – ours has continued to grow in trading volumes, liquidity and tightness of buy/sell spreads despite little new product having come to our equity market. But new product is coming. On the regulatory front, the Financial Markets Authority has been launched successfully. It has an excellent chief executive, a strong governance board, a reasonable budget and a mandate to restore investor confidence. Restoration of investor confidence is fundamental to a healthy capital market and of course healthy capital markets are fundamental to New Zealand and NZX. This is interesting because failings in investor confidence can’t fairly be attributed to failings in the listed sector – the true culprits, we all know, are some of the participants in the finance company sector, the unlisted real estate syndication sector, and the broader public unlisted sector where mum and dad investors have suffered real loss and where protection from insider trading and requirements for information disclosure are not present – but the listed sector feels like it suffers guilt by association. Before I deal with the other favourable macro factors, let me address one other “guilt by association” that is an ongoing source of frustration for just about everyone at NZX. I’m referring here to the continually claimed, but actually non-existent, correlation between a public offering failing or not proceeding because of lack of investor appetite and attribution of blame for that to an NZX failing. In fact, these issues have virtually nothing to do with NZX. NZX runs a highly efficient cost effective infrastructure and information market for listed securities. If an IPO doesn’t sell well or doesn’t proceed to listing, this is almost always because investors or brokers feel it is over-priced, an unproven business model, unduly speculative, the numbers or prospects don’t stack up or it’s unappealing for some other reason. This is not a failing of NZX nor in many cases of the capital market. It is a good thing if capital markets participants are discerning – and a mismatch in expectations between IPO promoters or vendors on the one hand and prospective buyers on the other cannot be laid at NZX’s feet or necessarily at the feet of the capital markets. There is no shortage of investment capital here for product that is fairly priced – particularly quality product – and there are many examples over the last year. The Vital Healthcare offering is a great example where local investor demand for that Trust’s rights issue was double the $100m plus or so that was sought. It is precisely because the bringing of a company to market is an event that NZX can’t control (but can to some degree influence) that we made the critical decision many years ago to diversify into more controllable growth initiatives. The perceived panacea of listing in Australia is another case in point. Yes no question – that market is bigger. But investors buy quality companies wherever they are listed. Australian investors will buy quality New Zealand companies on NZX – and they won’t buy poor quality companies just because they are listed on the ASX. Small to medium listed companies that are relevant to investors and analysts here are less likely to be relevant in the larger pool that is Australia and no more likely to enjoy research coverage or sustained, if any, attention. It makes sense to have a listing where a company’s investors are, where its business is primarily located, where its brands are recognized and importantly, where it’s relevant to the local community. Investors invest in quality companies that operate in economies that investors are prepared to back. A company with its prospects tied to an underperforming economy won’t be particularly well received anywhere – certainly not outside its home market. Moving or increasing the number of markets in which a company is listed will increase compliance and other costs, will frustrate management, but it won’t change investment fundamentals. If listed companies wish to list on other markets as well, that’s fine but I ask two things – they do so after proper objective analysis of costs, benefits and the experience of others – and if they do so, they be honest about their motivations and not take the opportunity to take an unnecessary swipe at either NZX or New Zealand’s capital markets generally. Anyway – back to the macro factors – savings, which are critical to the capital raising process, are increasing both as a result of the snowballing KiwiSaver programme and the population’s learnings from the global financial crisis. Changes to the KiwiSaver programme in the 2011 budget have introduced a form of “soft compulsion” with the structure of the 3% hurdles. Having said that, it is hard to find an Australian who complains about the 9% compulsory superannuation levy (they complain about plenty else in the taxation area). The Government’s proposed mixed ownership model for SOE’s is a critical policy plank that will offer investment options to savers, allow the SOE’s to access capital for growth from shareholders who will say yes (when the Government’s priorities mean it is just about always fiscally constrained from so doing), while retaining Government control. If only opponents of this could have the intellectual honesty to recognize that it is a policy that has no losers.Emotive terms – such as “asset sell off” are not accurate and mischievous. For an example of its success one need look no further than Air New Zealand. And I sincerely hope that Government’s advisers are not misguided into thinking that to appeal to Australian investors, our SOE’s, with little or no presence in economies outside our own, should dual list on ASX or elsewhere. That would truly be a monumental waste of time and money and not a great signal for NZ Inc. I won’t dwell on NZX’s commitment to the rural sector – that’s a topic I’ve covered before and is well canvassed in much of the material we have released publicly. Clearly we are delighted to be partnering with Fonterra on the evolution of its capital structure and in providing the world’s leading suite of dairy derivative products to local and global participants from NZX. However, on the topic of mutuals generally, I would say that the impact of mutual structures on our economy is misunderstood. Mutual structures came into being, have prospered and have evolved for a number of important historical reasons. And they are fine when things are going well. The imperatives that drove mutualisation are less relevant today to non-rural sectors in particular and they can have expensive consequences. Let me give you an example – let’s take AMI. A strong position in the Christchurch property insurance market. A mutual – owned by a large number of policy holders – not necessarily transparent, seemed to be prospering – and it turns out - too big to fail. Given its importance to the Christchurch region, taxpayers, via Government commitment, were required to provide it support. A solution that the capital markets are there to provide and could have provided quickly, at a fair price and at private rather than taxpayer expense. Just like they did with Nuplex and many other companies in their hour of need. Not an option in the unlisted space. One wonders if the issues that AMI encountered, and I mean no disrespect to its board or management, would have been faced if it had the disciplines of accountability and transparency borne of a broader and in part institutional investor base, continuous disclosure and associated listing disciplines. Organisations like this need to understand the capital markets as tools to be used for the benefit of owners and not feared by boards or managers. Let me conclude with a few words on the international stock exchange landscape, which remains far from settled. Merger mania arrived with the proposed Singapore SX takeover of ASX late last year. Other deals were announced hot on its heels – involving London buying Toronto and Deutsche Bourse looking to take over the iconic NYSE. The usual flurry of misinformed comment followed here - NZX took almost panicked calls from some beseeching us to thrust ourselves onto the Australian deal – or something - lest we be stranded and left valueless with nowhere to go. Interestingly, none of those deals has closed. And where are we in all this? Like all businesses, change is constant. If we were reliant solely on our cash equities business, we would face many of the challenges that offshore exchanges who rely heavily on their cash equities businesses face. Merger mania has been driven by the need to build more and more scale at lower and lower cost with faster and more expensive technology to enable that business to remain profitable. Topline revenue growth in that business offshore is challenging and being fought for especially with off market trading platforms catering to larger and more sophisticated investors – actually traders more than investors. Our strategy remains to build businesses where New Zealand has an international competitive advantage and where NZX has an ability to grow global scale from New Zealand. Dairy derivatives are a great example where, through the bridges we are building between the rural sector and the capital markets, they are not readily able to be replicated by operators abroad. We are building actual and option value in that space and thereby looking to have our growth and value not correlated solely to the domestic economy. In conclusion, as we have signaled throughout this year, our emphasis as an organization is on “making our base work harder” – that means driving revenue growth out of our existing infrastructure and mainly across our existing market and product offerings, while maintaining appropriate cost control. We will continue to innovate and develop new markets and products to maintain and enhance our competitive position and meet demonstrated demand. |
FTSE Mondo Visione Exchanges Index:
Chairman’s Address To The 2011 NZX Annual Meeting
Date 17/06/2011