The shift from conservative to balanced for the KiwiSaver default funds could see around $400 million extra pumped into the local share market and $900m invested in overseas listed companies.
Research by UBS has revealed the impact of the Government-mandated change which will take place from December 1.
UBS analyst Marcus Curley says while $400m sounds like a lot of money it is only about 10 per cent of monthly trading volumes on the NZX.
“The numbers would suggest it is relatively modest. We are talking about $400m going into NZ equities.It is unlikely to have a significant impact on prices.”
But Curley said some companies could see their share prices impacted more than others.
“…it is quite hard to judge, with the active managers clearly they will have some preferred stocks and so for certain stocks we could see this being somewhat more meaningful.”
As well as the shift from conservative to balanced two of the six newly appointed default providers are passive investment managers, meaning they track indices using computer algorithms rather than a person individually assessing which companies to invest into.
“This could see $1.1 billion transition from active to passive.”
Curley says the bigger picture is that it will add to demand for New Zealand equities which has already been high because of low interest rates.
“It adds to a broader theme of demand for New Zealand equities against a backdrop of no real increase in supply or nothing of substance so far. If anything we have been losing companies around the edges.”
Curley says this could lead to more companies listing on the share market through an initial public offer.
“I think that is certainly a possibility given the relative strength of the market and also a period of greater stability. Now we are in a post-Covid world and companies have more confidence in their forecasts an increase in IPO activity is probably relatively likely.”
But he says weighing on that is the situation where the only initial public offer of substance this year has so far been pretty disappointing from a share price perspective.
My Food bag shares were priced at $1.85 in its IPO but have trended downwards since its listing, closing at $1.48 on Wednesday.
Curley also pointed across the Ditch and said there had been some really disappointing IPOs in Australia of late as well.
Last month non-bank lender Pepper Money went through an IPO with an offer price of A$2.89 and fell 10 per cent on its first day of trading. It closed at A$2.65 on Wednesday.
“That has created a bit of a dent in confidence levels in IPOs but that should be temporary. If the economic outlook and company outlook is improving and demand is still there you would expect a chance that IPOs return.”
Not all have done poorly, with DGL Group which dual-listed on May 24 on the NZX and ASX performing well so far.
The chemicals and dangerous goods company had a $1 a share issue price and raised $100m through its IPO.
Its shares hit $1.40 on Wednesday.
Curley estimates KiwiSaver will grow to around $200 billion in just over 10 years – it’s current around $71b.
“We expect future growth to come from population growth, increased KiwiSaver penetration and higher member contributions.”
Curley said on a per capita basis KiwiSaver was on par with where Australian Superannuation was after a similar timeframe and he expected it to grow at a similar rate to that scheme despite the Australian scheme being compulsory and New Zealand’s optional.
A growing share of KiwiSaver funds was also being invested into NZ shares. In the past it had made up around 7 per cent of the average KiwiSaver portfolio but had now climbed to 10 per cent.
Likewise, KiwiSaver schemes in the past owned 3 per cent of the NZX50 but that had now grown to 6 per cent or just under $8b.
“Assuming a constant portfolio exposure to NZ equities we could see this number grow to $20b by 2030.”
When KiwiSaver was launched one of its selling points was that it would help boost the local sharemarket but so far that has been quite limited.
“I think what has happened in hindsight is the default schemes have been more dominant than people would have expected.
“When you look at the old default schemes – the banks control the majority of that and the banks for all intents and purposes outsource the asset management decisions and that in combination with the default funds needing to be conservative has created a low allocation to equities but also a skew towards more global than NZ.
“I think that if there was a greater proportion of people who were choosing NZ based fund managers for their KiwiSaver we would end up with a different type of skew.”
Bonds are out
Conversely, while the default funds will invest more in equities, they will have less in bonds.
Curley estimates about $300m in NZ bonds and a similar amount in international bonds will need to be sold.
But he says it hard to judge what impact that will have on NZ’s listed corporate bond market as some of the bonds will be unlisted and others will be government bonds.
“The implication is hard to judge.”
It may be fund managers just cash up the bonds at maturity as well rather than rolling over the investing into another bond.
“They have got time to manage this as well. This doesn’t happen today it is in December. That obviously allows for a pretty orderly transition from that perspective.”
What about higher interest rates?
Some have suggested that forecasts for higher interest rates will create a headwind for New Zealand’s largely dividend-focused stock market.
But Curley believes interest rates would need to move a lot before demand for shares began to drop.
“We are at term deposit rates of 70 basis points. For that to be competitive with dividend yields it needs to triple I would have thought. Yes interest rates probably start going up at tail end of next year – 25 basis points, 50 basis points are probably not going to cut mustard.”
He said it was more likely to be well into 2023 or 2024 that investors started to believe in bank deposit rates again.
On a high
Medicinal cannabis firm Cannasouth received another share price enquiry from the regulatory arm of the NZX after its shares shot up 17 per cent this week to 48c prompting questions over whether it was meeting its continuous disclosure obligations.
Chief executive and founder Mark Lucas told the regulator it continued to comply with the listing rules and was not aware of material information that should be released to the market.
Last year the company received an enquiry in August from the regulator after its shares went up 32 per cent over a three day period.
It was also in compliance then.
Cannasouth will hold its annual meeting on June 28 where Lucas will be up for re-election as well as the appointment of two new directors.
Shareholders are also being asked to approve the issue of up to two million options to acquire shares.
This would be on top of the 1,150,000 options that were previously approved around the time the company undertook its IPO and have yet to be allocated.
The existing options are only available to employees whereas the new ones would be open to contractors and directors as well.
The company says it needs to have the ability to offer the options to incentivise more takeup of its shares and to encourage a “high level of commitment and retention of senior executives, contractors and directors” and to align “their interests with those of external investors.”
The options won’t be issued to Lucas or chairman Tony Ho.
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