Asset sale flaws?

There has been a lot of criticism of the asset sales progrom, much of it over the top, ill-informed (or deliberately misleading) political scaremongering. Claims of ponzi schemes and the poor subsidising the rich diminish the credibility of those opposing.

But there are some basic flaws. One of the stated aims of the MOM Bill share floats is to encourage many more New Zealanders into share market investment.

If you have a mortgage…

…common advice is to pay off all your debts (your mortgage) before investing money. To an extent this is wise advice, but not totally.

  • Property investors commonly buy more properties, leveraging of partial equity. They don’t wait until they have paid off one property completely before buying another.
  • Making modest investments establishes an investment habit and knowledge of the market so you are prepared for greater levels of investment once you are mortgage free.
  • Some people establish a mortgage repayment level and as their income grows they just spend more, so share investments may not make any difference to how quickly they repay their mortgage.

If the MOM floats look like a very good deal, especially with loyalty share incentives, I’ll happily buy a few shares while still paying off my mortgage.

Lack of diversity

The biggest flaw I see in the MOM floats is the lack of market diversity. One of the most important rules of sensible investment is to spread your investments across different types of investment (shares, property, bank deposits etc) and within one investment type spread the investment across different sectors.

Four of the SOEs being part floated are in the energy sector. It is generally regarded as a sound medium term investment sector but new investors should not be encouraged to invest completely in the same sector.

Air New Zealand is the exception, but airline investments are much riskier.

Float fatigue

I expect the Mighty River Power float to go well, with a lot of interest. Many new investors should be enticed into the market.

But each subsequent float will have trouble keeping the interest from small and especially new investors. Large investors like Kiwisaver funds, the Super fund and ACC should still be interested as they already have diversification across many investment types (and across the world). But if small investor interest wanes it may be difficult to ask for premium prices.

They probably won’t sink, but…

…the floats are on too narrow a range of investments to really spark and sustain new investor interest.

The Government has a limited range of SOE options for floating.

What the New Zealand Share market really needs is a much wider injection of investment opportunities from the private sector.

Drilling and mining…

…is one possible source that the Government is promoting, but that’s a relatively high risk investment sector.

What else should New Zealanders invest in?

I’d like to see a much bigger investment in energy conservation and micro generation, but that may impact on the value of the power shares being sold – unless the part floated power companies make a serious move towards future energy business.

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1 Comment

  1. An educational point – thanks for that. You’re right – there’s not a lot of diversity in investment options. Fonterra might be a good one but there float is mainly in-house?

    Reply

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