Equity Ownership Survey New Zealand 2017 15 December 2017 Investment Strategy Group: Strategist: Bernard Doyle Asset Allocation: Hayden Griffiths NZ Equities: Rickey Ward Analyst: Andrew Thompson Analyst: Harrison Knapp +64 9 365 0897 +64 9 365 0895 +64 9 365 8902 +64 9 365 0884 +64 9 365 8903 bernard.doyle@jbwere.co.nz hayden.griffiths@jbwere.co.nz rickey.ward@jbwere.co.nz andrew.thompson@jbwere.co.nz harrison.knapp@jbwere.co.nz Offshore Ownership Continues To Grind Higher • The New Zealand market has maintained its appeal to offshore investors during 2017 with ownership increasing to 37.9%, from 36.3% in 2016. This is the highest level since 2009. The remarkable uptake of both a2 Milk and Xero (now majority owned by offshore investors) has had a notable influence on the overall proportion of foreign ownership in NZ. The effect on the JBWere Equity Ownership Survey is significant; if we exclude the impact of these two constituents we would have seen a 0.60% decrease in the level of foreign ownership in NZ, with bond-like equities generally less well owned. Initial Public Offering (IPO) activity has remained subdued in 2017 with Oceania Healthcare being the only company to come to market. Despite the supportive market environment the pipeline is anticipated to remain relatively quiet heading into 2018 with Vodafone NZ being the only known potential float at this stage. The most significant change in this year’s survey was the total New Zealand market capitalisation to GDP ratio which increased by 4% to 46% on the back of strong returns that have surpassed the increase in GDP over the same period. This level of market capitalisation to GDP is the highest level since 2000 and significantly above the historical 39% average. • • • Foreign ownership increases to 37.9% Level of Foreign Ownership 50% 41% 39% 40% % foreign owned Foreign Ownership Internationally 60% 44% 38% 36% 36% 35% 35% 36% 33% 33% 33% 30% 25% 20% 15% 50% 50% 38% % foreign owned 45% The New Zealand market has maintained its appeal to foreign investors during 2017 with the level of foreign ownership increasing to 37.9%, from 36.3% in 2016 (below, left). This is the highest level since 2009. This year, our survey covered 65 companies, which accounts for 94.4% of the S&P/NZX All index. 38% 40% 30% 30% 20% 15% 10% 10% 5% Source: JBWere ISG, Company data, Computershare, Merlin IR Sep-17 Sep-16 Sep-15 Jun-14 Jun-13 Jun-12 Jun-11 Jun-10 Jun-09 Mar-07 Mar-06 Mar-05 0% 0% US Japan New Zealand Australia Source: JBWere ISG, Company data, Computershare, Merlin IR, Japan Exchange Group, Australian Bureau of Statistics For further information on this publication please contact your JBWere adviser 1 New Zealand Investment Strategy Offshore investors’ significant holdings in a2 Milk and Xero, combined with the higher weighting of these two constituents within the NZ market has offset the general theme of offshore investors rotating their funds away from large capitalisation bond proxies as the ‘hunt for yield’ thematic loses some appeal. That said, versus international peers NZ offshore ownership remains relatively high (above, right). The remarkable uptake of both a2 Milk and Xero (now majority owned by offshore investors) has had a notable influence on the overall proportion of offshore ownership in NZ. The effect on the JBWere Equity Ownership Survey is significant; if we exclude the impact of these two constituents we would have seen a 0.60% decrease in the level of foreign ownership in NZ, with bond like equities generally less well owned. Offshore ownership significant movers since 2016 Marginal foreign ownership decrease in many of New Zealand’s largest companies emerged Of the 65 companies we surveyed, there were 14 companies that saw foreign ownership decreases of greater than 1%, 19 that saw increases over 1%, and 26 that were recorded as essentially unchanged (i.e. within a +/-1% range). There were 6 companies included in this year’s survey that were not included in the 2016 survey. Aside from the remarkable level of traction that a2 milk and Xero obtained during the year from foreign investors, a handful of large caps that had fallen out of favour with local investors due to poor performance also saw a modest increase in offshore ownership. However that was offset somewhat by the drift away from yield-plays described above. Even though an overall headline increase in offshore ownership occurred, a general theme emerged with a marginal decrease in foreign ownership in many of New Zealand’s largest companies. Market Structure: Offshore and portfolio- style up, NZ managed funds flat Ownership structure of the New Zealand Market NZ Retail Investors 22.6% Other Offshore Owners 33.4% NZ Managed Funds 21.4% Offshore Strategic Stakes 4.6% NZ Strategic Stakes 18.0% Source: JBWere ISG, RBNZ, ACC, IRESS, Company data, Computershare, Merlin IR Ow nership structure of NZX prim ary listed stocks since 2005 Mar-05 Mar-06 Mar-07 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Sep-15 Sep-16 NZ Managed Funds 15.6% 16.7% 15.8% 19.1% 20.5% 22.3% 23.5% 23.2% 22.1% 22.4% 21.5% 21.4% NZ Strategic Stakes 17.1% 16.0% 16.6% 21.1% 21.3% 18.4% 18.0% 17.9% 18.5% 18.1% 19.0% 18.0% Offshore Strategic Stakes 15.9% 12.0% 13.2% 15.2% 13.1% 13.2% 13.0% 8.6% 7.3% 4.9% 4.9% 4.6% Other Offshore Ow ners 28.4% 29.4% 25.9% 22.9% 23.0% 22.7% 22.1% 24.4% 25.8% 27.7% 31.4% 33.4% NZ Retail Investors 23.0% 26.0% 28.4% 21.7% 22.1% 23.4% 23.3% 25.9% 26.4% 26.9% 23.2% 22.6% Total Foreign Ow nership 44.3% 41.4% 39.1% 38.1% 36.1% 35.9% 35.1% 33.1% 33.0% 32.6% 36.3% 37.9% Source: JBWere ISG, RBNZ, ACC, IRESS, DataStream, Company data, Computershare, Merlin IR For further information on this publication please contact your JBWere adviser 2 Sep-17 New Zealand Investment Strategy Offshore investors absorb NZ strategic stakes Offshore ownership (non-strategic) increases, while offshore strategic ownership marginally decreases We have seen offshore ownership (non-strategic) increase to a record high of 33.4% representing a 2% increase over the last year. This increase appears to have absorbed the decrease in NZ domiciled strategic stakeholders (i.e. >10% ownership in a company) as the proportion of ownership fell by 1% to 18%. However even though offshore ownership materially increased we did not see the same underlying trend occur with offshore strategic stakes, which marginally decreased. We do note that prominent strategic holdings continue to have an influence on the report; examples include: Synlait Milk (Bright Dairy & Food Company), Precinct (Abu Dhabi Investment Council) and Tower (Suncorp). NZ managed funds ownership remains flat NZ managed funds ownership remain flat at 21.4% During the year the proportion of market ownership by NZ managed funds remained reasonably flat at 21.4% (see table on the previous page). This is a little surprising given the increasingly material effect of KiwiSaver inflows and the increase in the level of funds that the NZ Super Fund has invested in the market. We expect this trend to change as the momentum of KiwiSaver inflows continue on the back of a growing population, increased penetration and higher member contributions. In addition, the new Labour government intends to resume contributions to the NZ Super Fund starting in June 2018, contributing a planned total of $7.7bn by June 2023. Material inflows into the market from the ongoing momentum of KiwiSaver and the resuming of contributions to the NZ Super Fund may place further pressure on market liquidity (see chart below, left). This positive demand environment puts the onus on supply (IPO, secondary issuance) to continue growing the role of the listed sector in NZ. Portfolio-style investor ownership increases Portfolio-style investors ownership increases to a record level Portfolio-style investors’ (managed funds and NZ retail investors, a measure of non-strategic holders who are likely to trade more actively) ownership has rebounded from its decrease last year to an alltime high of 79.4% (see table below). This has resulted in the median monthly market turnover continuing to improve, and it is now sitting at around NZ$3.2bn for the period (see chart bottom, left). Portfolio-style investor breakdow n of NZX prim ary listed stocks Mar-05 Mar-06 Mar-07 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Sep-15 Sep-16 Sep-17 Strategic Stakes: Offshore Managed Funds 3.0% 2.2% 3.1% 2.9% 3.0% 2.0% 1.2% 0.9% 0.5% 1.2% 1.4% 2.0% Other Offshore Ow ners 1 28.4% 29.4% 25.9% 22.9% 23.0% 22.7% 22.1% 24.4% 25.8% 27.7% 31.4% 33.4% Strategic Stakes: NZ Managed Funds 1.4% 2.1% 2.6% 1.3% 0.7% 0.8% 1.1% 0.7% 1.2% 3.3% 0.6% 1.0% Other NZ Managed Funds 14.3% 14.6% 13.3% 17.7% 19.7% 21.5% 22.4% 22.5% 20.9% 19.1% 20.9% 20.5% Total Managed Funds 47.0% 48.2% 44.8% 44.9% 46.5% 47.0% 46.8% 48.5% 48.3% 51.4% 54.3% 56.8% Managed Funds + NZ Retail 70.0% 74.2% 73.2% 66.6% 68.6% 70.4% 70.1% 74.4% 74.7% 78.3% 77.5% 79.4% 1 M ainly managed funds, but a small po rtio n are retail investo rs. Number of IPOs in New Zealand 85% 0 50% Market liquidity, lhs Portfolio investor ownership, advanced one year, rhs Source: JBWere ISG, DataStream 14 12 10 8 6 4 2 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 55% Jan-17 60% 500 Jan-15 1000 Jan-13 65% Jan-11 1500 Jan-09 70% Jan-07 2000 Jan-05 75% Jan-03 2500 Jan-01 80% Jan-99 3000 % of market 3500 NZX Market Liquidity and Portfolio Investor Ownership Jan-97 Median monthly turnover ($mn) Source: JBWere ISG, RBNZ, ACC, IRESS, DataStream, Company data, Computershare, Merlin IR Source: JBWere ISG For further information on this publication please contact your JBWere adviser 3 New Zealand Investment Strategy IPO activity remains subdued, but increasing prominence of NZ’s capital market is likely to be short lived Only one equity IPO in 2017; market capitalisation to GDP increases significantly Initial Public Offering (IPO) activity has remained subdued in 2017 with Oceania Healthcare being the only company to come to market. This low level of IPO activity has not been seen since the GFC (see chart above, right), despite a supportive environment with considerable market momentum over the last few years. Other corporate activity (e.g. separations of existing assets) has remained relatively subdued over the last year as well with Tilt Renewables being the only spin-off to occur during the latter part of 2016. Despite the supportive market environment the pipeline is anticipated to remain relatively quiet heading into 2018 with Vodafone NZ being the only known potential float at this stage. The most significant change in this year’s survey was the total New Zealand market capitalisation to GDP ratio which increased by 4% to 46% (see below chart, left) on the back of strong returns that have surpassed the increase in GDP over the same period. This level of market capitalisation to GDP is the highest level since 2000 and significantly above the historical 39% average. The New Zealand capitalisation of the stock market has remained traditionally low compared to its peers; th however over the last year (as of 30 June) the gap has proportionally narrowed on all of its peers, except for the United Kingdom. This all-time record market capitalisation of c. $122B and increase in the ratio to GDP will experience a set back next year with Xero’s announced intention to delist from the NZX. International Market Capitalisation vs. GDP New Zealand Market Capitalisation vs. GDP 80% 140% 128% 120% 130% 70% 112% 60% 100% 91% 50% 80% 40% 60% 30% 46% 40% 20% 20% 10% 2015 United States 2009 United Kingdom 2003 Canada 1997 Australia 1991 New Zealand 1985 0% 0% Source: DataStream, JBWere ISG Source: Data Stream, The World Bank Group, JBWere ISG Survey Methodology Construction of average The s urvey is done as a weighted average, i.e. treating the New Zealand m arket as a pool of generic equity s upply apportioned am ongs t a group of inves tors . This m eans that even if no s ignificant trading was done, changes in overall owners hip levels could s till be influenced by the changing prices of individual s tocks . Survey coverage Weights for the headline offs hore owners hip es tim ate are bas ed on the S&P/NZX All index. This index covers all com panies that have NZ as their hom e exchange, ie it excludes Tels tra, AMP and other offs hore-bas ed s tocks . This year, 65 com panies were included in the s urvey, com pris ing 94.4 % of the S&P/NZX All index. Layers of ownership We calculate “firs t round” levels of owners hip only. For exam ple, ZEL has partial offs hore owners hip as a s tand alone com pany. ZEL in turn owns 15.4% of NZR (at the tim e of the s urvey). However, we treat this 15.4% as a dom es tic s take, rather than calculating through the "beneficial" offs hore owners hip in NZR via ZEL's holding in it. Data timeliness The data us ed to com pile the overall averages com es from various s ources with variable lags . In this res pect it is appropriate to view the data as a Septem ber Quarter "weighted average", rather than as a precis e point es tim ate. Revisions Revis ions are m ade to his torical es tim ates from tim e to tim e. Unles s thes e are judged to have a m aterial im pact on the s urvey, we will not explicitly highlight his torical revis ions . Thes e can be m ade available on reques t. Acknowledgements JBWere would like to thank Merlin IR Cons ulting for their as s is tance with the report. Source: JBWere ISG, DataStream, IRESS For further information on this publication please contact your JBWere adviser 4 New Zealand Investment Strategy General Disclaimer This document comprises general advice only. 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