The Taskforce’s paper consists of six groups of recommendations for New Zealand’s capital markets. According to the report, if implemented, the ideas will improve the contribution of capital markets to the country’s economic growth and bring significant fiscal benefits to New Zealanders.

The CMDT has proposed that regulations be established to improve financial advisory services and information available to investors, along with improving investment literacy. Suggestions include replacing investment statements and prospectuses with more standardized disclosure documents. Warnings should be applied to high-risk and complex investments products.

The paper identifies several perceived gaps in the capital market, and aims to remedy them. Key recommendations include partial listing of central and local-government companies, government intervention in developing the local annuities market and establishing New Zealand as agricultural capital market hub.

According to the CMDT, the Reserve Bank and the New Zealand Stock Exchange should collaborate to improve the country’s settlement and clearing infrastructure. Also, tax biases between different savings and investments need to be eliminated through options such as : the risk-free return method, denial of depreciation deductions on buildings, a general capital gains tax, or an asset specific capital gains tax.

The full CMDT report can be viewed on the Ministry of Economic Development website.

Photo by Remon Rijper

The January 29th Official Cash Rate (OCR) announcement followed what many already thought would happen, although to a greater degree. The OCR was cut 150 basis points to the lowest level it has ever been at, reaching 3.5%.

Kiwibank and Westpac have already adjusted their one year fixed term home loan interest rates accordingly, but Reserve Bank Governor Alan Bollard urges other banks to do the same and pass the lower rates to customers. The interest rate cut had positive effects on early morning trading on the New Zealand Stock Exchange (NZX). Although falls were seen with the New Zealand dollar falling below 52 cents against the U.S. Dollar.

With hopes pending on President Elect Barack Obama’s proposed U.S. Economic stimulus package, American investors are apparently more open to the prospects of higher yield yet higher risk investments. In effect lowering demand for safer currencies like the Japanese Yen and raising that for the likes of the Kiwi. The package prosposes to aid joblessness and relieve tax payers earning below USD$200,000 a tax break of USD$500, or USD$1,000 for couples.

Combined with the highest Christmas season spending on record and positive first weeks of 2009 New Zealand Stock Exchange trading, the Kiwi is seeing positive resurgences against numerous currencies. The kiwi has seen a seven week high against the Yen, reaching 54 Yen, and a month high against the Euro just below 0.425.

Even measured via a long run average prior to 2003, the NZX has been trading at a below value median of 8.2%, but this figure took an uncharacteristic sharp turn downwards in late 2007 to reach its current level of 33.2%. The NZX index has fallen over 1000 points since May, 600 of those have been since the post September “Financial Crisis”. It would seem that this trend will continue with the NZX falling further amidst the increased volatility of international markets.

Commenting on the report, Rob Mercer of Forsyth Barr research, said that while current prices are technically very good value for money, he does not expect to see an increase in purchasing as even though the shares are well priced they are still subject to the anxiety felt about today’s financial environment. He also said that with this lack of confidence that there was a lack of depth on the buy side of the market.

Following Black Tuesday, the New Zealand Stock Exchange (NZX) has progressively closed on a down note. The last trading day of the week, Friday the 10th of October, saw a fall of 4.724%. This trend is continued to an even greater extent in markets throughout the world. By trading close on the Friday, the Japanese market closed 7.7 % down, with drops as low as 11%, and the Australian market saw a drop of over 8%. Trading on the NZX on the Friday was characterized by the NZSX-50, which was faced with the fact that there were only 9 rises throughout the day, and 94 falls.

Locally, solutions have been proposed from many parties. Of these the idea of drastic decreases in the official cash rate, and the paper bought forward jointly by the New Zealand Institute and NZX, are receiving the most attention.

While analysts expected an upcoming interest rate fall of over 50 points, claims have come in that 100 points would be the necessary amount. Some analysts do denounce such thought, claiming that there was not enough hint of crisis in New Zealand to justify changes before the next official Reserve Bank announcement, in two weeks. Further, New Zealand was not faced with a situation which would be remedied by such drastic short-term actions, and instead would benefit from a sound long-term plan.

The other popular suggestions are those bought forward by New Zealand Institute chief executive David Skilling and NZX chief executive Mark Weldon, in their paper “Economy on the Edge: Swan Dive or Belly Flop?”. These include abolishing tax advantages for house investment, lowered temporary tax rates for returning New Zealand ex-pats, allowing provisional tax rate payments in arrears and gathering and selling partial stakes in Government owned businesses.

At the time of writing, the NZX 50 index was at 3170 points, up 129 points from its lowest point this week, shortly after market opening on Tuesday. The weekly high was reached on the Thursday, at just below 3230 points.

The current bout of volatility is a product of the Wall St financial crisis. The weekly low, which is by some now being called “Black Tuesday”, was caused by the US Congress not passing the proposed $700 billion bailout plan. Analysts now say that this effect was purely reactionary and the recent optimism was more in line with the financial risk that New Zealand faces from the events on Wall Street. This sentiment is also aided by the passing of a revised bailout plan through the US Senate.

The extent of the Wall Street crisis can be best judged on various American stocks. Various big name stocks have faced intense price falls, including General Electric which had a 10% fall in price from discount share sales.

Markets around the world, including the New Zealand Stock Exchange (NZX) faced plummets after the news hit of the US Congresses’ rejection of the $700 billion bank bailout plan. While damage in New Zealand is said to be relatively minimal, due to the lower exposure to credit, drops have occurred and are unlikely to rise. The NZX reached its lowest point today shortly after 10am when it had dropped 144 points, although this has steadied out to 129 since.

The effect of the rejected bailout was felt harder in more relevant markets. The Dow Jones closed 770 points down, making it the worst drop in a single day on a points scale. The ASX is said to have lost over $A55 billion throughout the day, exceeding the entire value of the NZX.

The Australian Securities and Investments Commission (ASIC) banned all forms of short selling on the 19th of September, widening the previous ban on “naked” short selling to include “covered” short selling also. While this action was a response to the turmoil caused on the ASX by naked short selling, the NZX does not see enough short selling activity to warrant such a ban at this point.

Geoff Brown, the NZX markets development manager, was quoted as saying that New Zealand firms are already required to disclose any short sales and that in the eyes of the NZX, short selling was a legitimate activity. He also said that the moves taken against short selling by other markets (ASX) were an extreme response.

Covered short selling is when an investor would sell a share they do not own at that point, only having a contract to hire or borrow the share for a time. This is done with the expectation that the share will soon fall in price, allowing the trader to purchase it at back at a price lower to what they sold it at.
Naked short selling is similar but the investor does not even have a contract to borrow the share, just the obligation to buy it back within three days of the sale.

The Australian Securities and Investments Commission (ASIC) banned all forms of short selling on the 19th of September, widening the previous ban on “naked” short selling to include “covered” short selling also. While this action was a response to the turmoil caused on the ASX by naked short selling, the NZX does not see enough short selling activity to warrant such a ban at this point.

Geoff Brown, the NZX markets development manager, was quoted as saying that New Zealand firms are already required to disclose any short sales and that in the eyes of the NZX, short selling was a legitimate activity. He also said that the moves taken against short selling by other markets (ASX) were an extreme response.

Covered short selling is when an investor would sell a share they do not own at that point, only having a contract to hire or borrow the share for a time. This is done with the expectation that the share will soon fall in price, allowing the trader to purchase it at back at a price lower to what they sold it at.
Naked short selling is similar but the investor does not even have a contract to borrow the share, just the obligation to buy it back within three days of the sale.