Nzx Open Magazine, Issue One 2005 - "perspective"

2005

NEW ZEALAND IN 2010 − WHERE WILL WE BE? NEW ZEALAND INC. SPEAKS ACCELERATE YOUR WEALTH CREATION ABN AMRO LAUNCHES WARRANTS

Issue One 05

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CHANGING PERSPECTIVE Mark Weldon Chief Executive Officer, NZX

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PERSPECTIVE

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WANTED Dr. Alan Bollard Governor, Reserve Bank of New Zealand

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INNOVATION Brian Ward Chief Executive Officer, NZBio

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THINK LOCAL, ACT GLOBAL Mark Franklin Chief Executive Officer, Vector

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A LUST FOR ENTREPRENEURSHIP Geoff Ross Chief Executive Officer, 42 Below

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Bill Day Chief Executive, Seaworks Ltd

Cover image; Battle of San Romano, Paolo Uccello, 1445c. Uccello was a key figure in the development of perspective, along with architect Brunelleschi who first developed the methods of portraying three dimensional space. Uccello’s works were seen as ‘essays in perspective’ and he represented the views of many artists of the time. These include the sculptor Donatello, painter Masaccio and Alberti, who wrote a Treatise ‘On Painting’ in 1435, documenting the method of using mathematical or single vanishing point perspective.

The Battle of San Romano currently hangs in the Ufizzi Gallery in Florence.

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CREATING THE ENVIRONMENT FOR WEALTH CREATION

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A CULTURE OF SUCCESS Ian Narev Managing Partner, McKinsey & Company

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BUILDING BETTER BUSINESSES Brian Gaynor Business Columnist, New Zealand Herald

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SAVINGS Lance Jenkins Managing Director and Chief Executive Officer, Goldman Sachs JBWere (New Zealand)

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SUSTAINABILITY AND INTEGRITY Peter Townsend Chief Executive, Canterbury Employers’ Chamber of Commerce

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SELF DETERMINATION, SELF RELIANCE Dr. Roderick Deane Chairman, Telecom

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BUILDING A NATION ON PRIDE AND PASSION Chris Moller Chief Executive Officer, New Zealand Rugby Union

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PRODUCTIVITY = POWER Scott St John Chief Executive Officer, First NZ Capital

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FROM THE HEARTLAND ABN AMRO INSTALMENT WARRANTS Aaron Milne Director, ABN AMRO Equities New Zealand Ltd

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DIRECT MARKET ACCESS Adrienne Quinn NZX Participant Relations Manager

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SMARTSHARES LAUNCHES SAVINGS PLANS

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NZX OPERATING METRICS

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MARKETPLACE

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Q1-05 UPDATE

Welcome to the first edition of OPEN for 2005. In this edition, we are delighted to be able to bring you the views of some of New Zealand’s business leaders on where they want to see the New Zealand economy in 2010. We have called the edition Perspective, and are featuring on our cover Uccello’s Battle of San Romano. This image helped people to see how perspective actually worked – by making things further away appear smaller. The link to our edition and the economy in 2010 is quite simple, things that are far away – and may appear small – can approach with rapidity. Moving towards the future, and towards elements that are approaching, is a much smarter perspective than retreating. On reading each article you should gain some insight into what “NZ Inc” thinks is on our immediate horizon. You will also notice that some common themes emerge. Opinions seem to centre on productivity, growth, building a culture of success and ‘taking it to the world’. The opinions are diverse on what political and economic structures need to be in place, but united on the attitudes and mindsets that will build an economy that is robust and well geared to face our future. Here at NZX, we are both challenged and excited by the perspectives portrayed in this edition. We see our role, as a provider of capital to companies and investment opportunities to New Zealanders, as being an integral part of the solution. Our focus has been – and will continue to be – on ensuring our marketplace environment and operational infrastructure is world class and capable of growing to keep up with the emerging potential of NZ Inc, in their mission to take on the world. We hope these Perspectives will offer you a fresh insight into the great potential of New Zealand businesses and how we can work to ensure we are creating the right environment for success.

Melissa Jenner NZX Communications

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CHANGING

PERSPECTIVE MARK WELDON C H I E F EXECUTIVE OFFICER, NZX

The New Zealand business mindset has traditionally been that ownership is immaterial and it makes no difference whether New Zealand ends up as an economy fuelled by ownership, or by income. There may have been a blip in time when ownership versus income could be viewed as a distinction without a difference, but that time is gone.

It is a truism that, for there to be any material increase in our standard of living, New Zealand companies must develop lasting competitive advantage in global markets and, crucially, the benefits of that competitive advantage must accrue here. To determine what needs to be done to make the New Zealand economy great in 2010 we therefore need to focus on what will give New Zealand businesses the best possible chance to develop advantages that will win globally. It is my belief that in 2010 sustainable competitive advantage, and hence real economic returns, will for countries outside China/India/Brazil be driven almost entirely by intangible assets like brand, patents and design, whether in children’s clothing, vodka or tourism. To me, creating these intangible assets, and ensuring that they are owned here, should be the single goal of our private and public economic planning over the next decade. The economy is a complex system like the human body. This article focuses on what I believe will get the economic body of New Zealand competing and winning on a global level. A sick or unhealthy body can not run and leap. A healthy and fit body can do all sorts of amazing things.

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Basic health – savings and deeper capital markets

Right now the body of New Zealand, the economy, is pretty healthy, as can be seen in most of the numbers. To keep it healthy over the medium term, however, a change of diet will be required. At the bottom of the economic food pyramid, the base that maintains the heart pumping, is savings. Improved savings outcomes will pump blood into both the household balance sheets and company fortunes. The main structural change needed, which is currently being debated and addressed at the policy level, is to create individual long-term savings accounts for all New Zealanders, with contributions primarily coming out of workplace earnings. As a recent quote in The Economist stated, “[in] New Zealand, personal savings rates are negative as people borrow to consume more than they earn”. Workplace superannuation needs to be introduced and be made to work. For success, three things are needed: • a minimum level of compulsion, • incentives available for those who choose to save beyond the compulsory amount, and

• a very simple framework that people can use easily and be confident in. Based on numerous conversations, a plan that involved a mix of a targeted tax cut of about 1-1.5 cents in the dollar with an extra 1.5-3 cents directed from each person’s pretax earnings into individual savings accounts, alongside a range of incentives for workers to contribute further pretax earnings on a matched basis by employers, would be almost universally well received. While it would cost the Government purse, it will result in a much healthier nation at both the individual and company level as we position ourselves for our future. If these actions are taken, households will be able to provide for retirement, education and the passages of life where individuals have no earning power and must use their individual balance sheets to get them through. Productive business investment will also increase and, importantly, the suite of intangible assets that will deliver us competitive advantage will also increase significantly. We have seen the growth of a local savings pool fuel all of these positive effects in Australia and in a myriad of other counties. It will happen here. Strength and fitness – growing the size and diversity of the workforce

With a healthy heart, the economy can start to grow some muscle. For me growing muscles is about getting our labour pool right. There is no question that lack of labour availability and the right skill base is the biggest risk to our medium term economic fitness. New Zealand needs both greater mass and diversity in our workforce to create the right environment for increased productivity and core growth. Independent of any “political correctness” arguments there are sound economic reasons to believe that, in a world where intangible assets and the ideas that create them are key, diversity is critical to economic outcomes.

It is my bet that small countries with homogenous workforces will fall rapidly down the OECD ladder over the next 20 years compared to countries that effectively leverage diversity. An experiment conducted by a group in New York is instructive. Groups of business people were clustered together to develop recommendations on series of hardcore business issues. Similarly, groups of non-business people from wide ranging backgrounds (think Navy Seal plus fine arts major) were put together. This latter group argued more, was much less affirming of how brilliant each other was, but got to much more creative and insightful recommendations. Groupthink is the opposite of creativity. Ultimately immigration should both fill needs and create opportunities. For example, immigration from China will grow our knowledge of that market and, through informal networks, result in substantial trade. Similarly with Brazil, which is another of the world’s major economies that is hard to penetrate without local knowledge. New Zealand, with its time zone position between Asia and America, is ideally situated to use significant immigration as a strategic tool to deliver a larger and more diverse labour pool that in turn delivers much stronger trade and innovation outcomes. Apart from trade and innovation outcomes, scale has its own virtues for our companies and their workers. New Zealand companies exhaust their local market quicker than their competitors and thus can be forced to sell their source of competitive advantage (their intangible assets) much too cheaply. A larger population, even a population of 5 million (about the same size as greater Sydney), would create a much stronger base for our businesses and the conditions so that we could keep the benefits of success here.

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Performance – dominating global slivers and ownership Dominating global slivers

With a strong heart and good overall strength, the New Zealand economy will be able to compete and win. For New Zealand, winning means that we develop deep expertise and become distinctive in a series of global slivers, niches and products where we can own and set pricing for a good part of the category. Current New Zealand examples would include Fisher & Paykel Healthcare, with its dominant global market share in high end medical devices for specialist situations, and luxury outdoor/beauty tourism (e.g. Blanket Bay, Huka Lodge). More broadly, these slivers could be product and expertise, and should be consistent with an evolved New Zealand brand which is based on a much broader notion of national distinctiveness than just rugby and the outdoors. This “NZ 2010” brand should have elements of Sir Edmund Hillary (independent), 42 Below/ Karen Walker (cool and edgy), Weta/Peter Jackson (creative) and our ex-pats and business stories like Fletcher Building, Michael Hill and Pumpkin Patch (international and successful).

“The

If we continue to sell companies offshore, those learnings and beliefs will never occur and we will end up as a call centre that can’t compete with the 2.5 billion people in India/China/Brazil. Unfortunately, as a recent Grant Thornton Global Business survey shows , New Zealand business owners have the highest expectation of a change in ownership over the next 10 years of any country globally. Learning how to succeed cannot be found in a book and, while it is intangible, it is very real. A good analogy from sport is the different approach of the Australian cricket team (winning) versus the New Zealand cricket team (playing). The core skill difference is not technical ability, but the knowledge of how to win. 1

In business the analogy is obvious. New Zealand companies continually innovate and create amazing products. But, unfortunately, that is where we mostly leave it. Unless we own the wins, and build on those, there won’t be much real change. To do that we need to start a virtuous circle based on ownership.

economy

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complex system like the

human body. A sick or unhealthy body can not run and leap. A healthy and fit body can do all

Going forward we should aspire to be the Swiss watch model, where Swiss watches have competitive advantage mainly by virtue of being Swiss. Film is a good example. Real success would mean that our individual brands (e.g. Peter Jackson, Richard Taylor/Weta) have been joined by others and created a national brand with a long-run competitive advantage and global value proposition.

sorts of amazing things.”

Ultimately I want to see New Zealand as a country with a distinctive reach right across the globe, with the benefits of ownership coming back to New Zealand, and each and every New Zealander participating in the benefits of those outcomes.

To achieve this, it is critical to get savings and labour right and have an ownership mindset. New Zealand can develop lasting sources of competitive advantage. What matters most is getting the settings right so that we can own the success in New Zealand, and as a country, own the benefits of lasting competitive advantage.

Ownership

Apart from ownership of intangible assets generating the real wealth, ownership of these assets in itself creates a priceless intangible asset: the knowledge, of how to win. This knowledge, along with institutionalisation of success and building a country where business success is in our DNA, creates a virtuous circle of knowing how to win and achieving it.

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Mark is the Chief Executive of NZX, and works closely with management to implement the Board’s strategies. Mark is also a Director of Smartshares Limited and Chairman of Link Market Services Limited.

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Grant Thornton Global Business Survey, released April 2005

PERSPECTIVE NZX asked ”NZ Inc” (a selection of business leaders in New Zealand) to give their perspective on where they see the economy in 2010.

WANTED RESILIENT BROAD BASED GROWTH D r. A L A N B O L L A R D GOVERNOR, RESERVE BANK OF NEW ZEALAND

Contributors were asked their views on three main issues: 1. What would they like to see the economy of New Zealand like in 2010? 2. What in their opinion, would need to change, for this to become a reality? 3. How would these changes impact the economy? Those who chose to give their views have been asked to be as open and honest about them in the interests of providing the market some insight into what could be. Their views are published unedited. Contributions are from: • Dr. Alan Bollard, Governor, Reserve Bank of New Zealand •

Brian Ward, Chief Executive Officer, NZBio

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Mark Franklin, Chief Executive Officer, Vector

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Geoff Ross, Chief Executive Officer, 42 Below

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Bill Day, Chief Executive Officer, Seaworks

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Ian Narev, Managing Partner, McKinsey & Company

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Brian Gaynor, Business Columnist, NZ Herald

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Lance Jenkins, Managing Director & Chief Executive Officer, Goldman Sachs JB Were

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Peter Townsend, Chief Executive, Canterbury Employers’ Chamber of Commerce

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Dr Roderick Deane, Chairman, Telecom New Zealand

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Chris Moller, Chief Executive Officer, New Zealand Rugby Union

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Scott St John, Chief Executive Officer, First NZ Capital

In addition, we asked a selection of New Zealanders their views on the same topic. These range from an 18 year old graduate to a retired Police Officer. NZX would like to thank all those that took the time to document their perspectives. We appreciate your candour and are challenged by your views.

What are the top three things that will need to change for the New Zealand economy to be where you would like it to be in 2010?

I could get all technical about this, but in simple terms my top picks are: • Increase labour productivity from roughly 1.5% p.a. to roughly 2% to keep growth strong. • Get a good Doha WTO trade round, or failing that, get a NZ-US Free Trade Agreement. • Increase our country’s overall savings rate in the medium-term. What would need to happen in order to facilitate these changes?

• Deepen our capital markets to work for New Zealand firms. • Don’t let our labour markets get increasingly inflexible. • Private sector managers need to make quality decisions. • Households need to invest in financial instruments other than housing. How would these changes impact the economy?

They will help us get resilient broad-based growth, at least equivalent to Australian levels, plus a good level of economic stability. Many of the other things that we want for New Zealand will follow from this.

Dr. Alan Bollard is currently Governor of RBNZ. His previous positions include Secretary to the Treasury, Chairman of the NZ Commerce Commission and Director of the NZ Institute of Economic Research. Dr. Bollard has also written a number of books on the New Zealand economy and worked as an economist in the UK and South Pacific. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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INNOVATION A POWERFUL ECONOMIC DRIVER BRIAN WARD CHIEF EXECUTIVE OFFICER, NZBio

New Zealand will become recognised as an originator of businesses, products and services that are elegant, smart, and distinctive. Our companies will rely on innovation in their products and services, business processes and models, and position themselves carefully within global value chains to maximise returns. As a consequence, intellectual property will become more and more important. The recent growth of the New Zealand economy has come more from increased labour utilisation than from increased productivity. Future growth must come more from increased productivity, and innovation will help to make this happen. The rise of the high performance exporter

Export-based companies will outperform other business categories; they will have a strong focus on growth and increasingly be publicly listed. Recent New Zealand economic growth has been driven more by domestic demand than by overseas demand (i.e. exports). Future growth needs to be driven more by satisfying overseas demand.

Currently, the most severe constraint to exploiting our existing innovations is a lack of funds to move projects from discovery to the ‘investor ready’ stage. The Government needs to apply serious public financial commitment to this stage, as its international counterparts have done. The private sector also has a role to play. Funding for early-stage companies in New Zealand is presently very limited. A relatively low portfolio allocation to high risk asset classes limits funding for new ventures, and in a small market individual company setbacks can have an inordinate influence on market sentiment. Success will breed success, but it is also a numbers game. In the meantime, we need to back ourselves and feed more private capital into the pipeline.

Innovation is the most powerful economic driver

The rise of the high performance exporter depends on New Zealand moving beyond just recognising the importance of building exports, to targeting niche opportunities that are high growth and high margin, where we can stake a claim as world leaders. Niche businesses within the life sciences stand out in this regard. Fundamental to this development is deeper insight by Government and businesses into opportunities of genuine competitive advantage where there are accessible channels to market. The Government’s “Growth and Innovation Framework” has begun to address this question.

There is no shortage of good ideas. New Zealanders, and particularly those involved in the biological sciences, are internationally recognised as originators of world class basic and applied research. We could do even better if public R&D investment rose from just below 1% of GDP to OECD norms of between 2% to 5% of GDP.

Further progress is dependent on an entrepreneurial partnership between the public and private sectors and an acceptance on both sides that the way forward is uncharted territory with uncertainties and risks, but if we are intent on lifting our economic performance then we must act with conviction. Government leadership is

Success will come from reaching outside of New Zealand early, with a determination to partner wisely and often. New Zealanders are famously self-reliant, but we can do better by working with international partners, whilst maintaining our enterprising spirit.

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“New Zealand will become recognised as an originator of businesses, products and services that are elegant, smart, and distinctive.” necessary to create an operating environment that favours high performance exporters. These companies need to have the opportunity to be on an equal footing with their international competitors and realise their full potential. If this means favouring high performance exporters over other businesses, so be it.

its clusters, networks, partnerships and collaborations, but government departments like the Ministry of Economic Development and New Zealand Trade and Enterprise are pivotal, bringing to bear their resources, skills and business-strengthening capabilities.

The taxation system also needs adjustment to facilitate the development of high growth companies. Their future value as taxpayers will more than compensate for early concessions. Regulatory and compliance requirements must be streamlined because this is an overhead that diverts resources from building the business. Within the private sector, we need to improve our ability to aggregate resources, build on individual and collective strengths, and create critical mass.

The economic benefits from these changes will be significant. The private sector wins through greater export revenues, higher growth, higher margins, higher value added products and services, enhanced competitive advantage, greater scale and better paid jobs.

Leveraging international partners

In the global marketplace there are very few areas where New Zealand can hope to dominate the entire supply chain, particularly given our distance from major markets. To grow companies quickly and capture the value of new technologies, New Zealand companies will need to be excellent at entering markets quickly and concurrently. Our companies need to develop the networks, skills and experience to be among the world’s best at executing sophisticated partnering arrangements to leverage distribution channels, profile, insight and new business options. Much of this responsibility falls to industry, with

Economic Impact

The Government wins through increased taxation revenue which means there is greater capacity to improve publicly funded services New Zealanders value, like better healthcare, education, social services, and environmental management. In addition, the economy will also have a broader base from which to grow in the future.

Brian Ward is currently the CEO of NZBio, New Zealand’s biotechnology industry organisation. Over the last 20 years he has worked in a wide range of roles in the area of life sciences, both in New Zealand and internationally. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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THINK LOCAL, ACT GLOBAL MARK FRANKLIN CHIEF EXECUTIVE OFFICER, VECTOR

As a nation we need to ensure there is real openness for investment. At present, there is no framework in place to give international investors long-term confidence and certainty. We talk about the country being open for investment, but too often contradict that by our reaction to proposed investments. We also need to continue to have a flexible labour market structure, giving people greater freedom in the way they balance their work and life but without undermining the “New Zealand efficiency of operations.

linked to business efficiency if they are to contribute to the country’s future success. These changes will enable New Zealand to improve our place in the world and to enjoy a better standard of life. It is going to be difficult to move up from being in the bottom half of the OECD’s wealth index. But we can do this or, at least, have it as an objective. Hope is not a good strategy.

By making these changes, we has to decide should be able to better compete in the world, and we will become whether we move proactively more innovative as a country. At the In my opinion New Zealand we are full of innovative is becoming over-regulated as or reactively, whether we moment individuals but, because of our increasingly there is a perception that law and policy will solve lead the way and control our regulatory environment and lack of flexibility in the labour market, everything. This needs to change own destiny, or whether we innovation is not encouraged. and the issues of regulation versus We also need to become more competition need to be better are simply pulled along.” attractive to overseas skilled understood. labour given we are now operating To a certain extent, these changes will occur by osmosis in a highly competitive world labour market. as the world moves on. But New Zealand has to decide The country would also benefit from opening up whether we move proactively or reactively, whether we investment opportunities and being an active player in the lead the way and control our own destiny or whether we global economy, with far greater control over our future and simply are pulled along. economic wellbeing than if we try to resist and regulate New Zealanders are generally aspirational, but we need to our way out of the global realities. back up those aspirations with effective action. We need to start acting as part of the global economy and have a Mark Franklin was appointed CEO of Vector in 2003. He more thoughtful view about the balance of nationalism has a Bachelor of Electrical Engineering from Sydney versus harmonisation with Australia. We need to recognise University and has extensive experience in the energy the long term benefits of opening up opportunities to and technology sectors in New Zealand, Australia and Japan. His previous leadership roles include international investors. There also needs to be a considerable change in attitude regarding labour reform and regulatory activity. Regulatory control is a breeding ground for potential inefficiency, and I believe any regulatory or labour reforms need to be closely

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Chief Executive of Orion Energy in the Hunter Valley (Australia) and Asia Pacific General Manager of IBM GSA for utilities. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

A LUST FOR

ENTREPRENEURSHIP GEOFF ROSS CHIEF EXECUTIVE OFFICER, 42 BELOW

A healthy economy in simple terms is one that is selling more than it is buying. A wealthy economy is one that is selling frickin heaps. To make this happen the three fingers that the Government needs to pull out are as follows: • Fast Start Tax Break for future exporters. The toughest time for any export business is the start. Upfront costs have been met but economies of scale are yet to be achieved. So how about giving start up companies tax incentives based on their overseas earnings growth instead of just punishing them for being productive. The 0-10 million tax break would make New Zealand companies the fastest out of the blocks in the world. • Encouraging a vibrant capital market. It’s a truth – a strong capital market is a necessary pillar for a strong economy. If all New Zealanders were active in our capital markets a huge amount of fuel would be added to our businesses. So let’s get Kiwis away from relying on selling their house to fund their retirement and encourage them to be active in the sharemarket by not taxing gains made on investments of any sort. • Education and having more Bill Gates/Rupert Murdochs per capita. In a typical effort to compensate for our size, New Zealand often uses the expression ‘more per capita’. ‘We won more Golds per capita at the Olympics’ or ‘We have more mobile phones per capita’. Well, into our country’s mindset we need to breed a lust for entrepreneurship, and a New Zealand culture that wants to create the next Microsoft or Newscorp. We should be creating companies that are big on the world stage, not just companies that are ‘quite big for New Zealand’. Let’s start by not paying teachers such crap money. Give teachers the incentives and the resources to start teaching our kids to reach for the stars. The ‘Spark’ programme at

“We should be creating companies that are big on the world stage, not just companies that are ‘quite big for New Zealand.” Auckland University does this really well. And there’s no reason their teachings can’t be formalised into the school curriculum. Let’s stop copping out by using that ‘per capita’ phrase. Also, lets get rid of OSH and any other hopeless Government bureaucracies gone crazy. And start selling New Zealand to the world on more than just mountains and movie sets. You actually can have a bloody good time here, it’s a fun, energetic place and a great place to party. We wouldn’t have a ‘Brain Drain’ if the brains were given a good reason to stay. Geoff Ross started distilling vodka in his Wellington garage in 1996. He sold his first bottle in 1999. 42 BELOW has now won Gold in the World Spirits Awards and Gold at many other competitions. 42 BELOW is in 10 countries worldwide, and this list is growing. The Ritz London, Beverly Hills Hotel, LA and more than 4,500 of the best bars worldwide now stock 42 BELOW. 42 BELOW is listed on NZX, and has over 40 staff placed in key markets worldwide. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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CREATING THE ENVIRONMENT FOR WEALTH CREATION BILL DAY CHIEF EXECUTIVE, SEAWORKS LTD

In 2010, I want to see a productive and growing economy that creates opportunities and prosperity for all New Zealanders. Economic growth is not an end in itself, but it is the key to lifting living standards. It is only through economic growth that our country can afford higher wages, good schools, first-class health care, better environmental protection, as well as opportunities for future generations. 2010 is not far away. To build the foundations for a stronger economy, we need to think well beyond 2010. As the experience of the 1980s and 1990s has shown, it can take years before the beneficial effects of policy reforms are felt in the economy. Equally, it takes time for the adverse effects of poor policy decisions to filter through.

Finally, we need to develop our human capital. We cannot compete with other countries on the basis of our size or natural resources. But New Zealand can compete with our minds and our creativity. Our education system has served us adequately in the past, but we need to aspire for much more. We need higher expectations, less regulation of education providers, changes to the way teachers are paid and rewarded, and more choice and competition across all levels.

“The private sector must be the main engine of economic growth, and the Government must play a supportive role.”

First, we need to put in place a policy environment that encourages innovation, entrepreneurship and wealth creation. The recipe for this is well known: clear property rights, a sound judiciary, good general laws, low taxes, a flexible labour market and a generally light level of regulation. The private sector must be the main engine of economic growth, and the Government must play a supportive role. Unfortunately, we have seen too many policy decisions take us backward in recent years – employment law, business regulation, taxation, welfare policies, to name just a few. Second, we need strong and effective legal and political institutions. MMP has been in place for almost ten years. It is time to review the system. I would also like to see the

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introduction of constraints on the growth in government. This could occur through a regulatory constitution and tax/ spending limitations in the Fiscal Responsibility Act.

New Zealand is small and isolated. A good policy framework can provide us with an important source of competitive advantage over other nations. We also need a change in attitudes, so that we become a nation that celebrates business success.

Bill Day is the owner and Managing Director of Seaworks Ltd, a specialised maritime company with a head office in Wellington and a branch in Dubai. Bill studied law at university along with a BA and MBA. He is also Vice Chairman of the New Zealand Business Roundtable. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

A CULTURE OF SUCCESS IAN NAREV MANAGING PARTNER, MCKINSEY & COMPANY

Our economy in 2010 harnesses the benefits of our small size, rather than laments its shortcomings. It shows that we can reduce the friction among different stakeholders that occurs in larger economies. We can build trust and focus around a national vision that looks outward towards New Zealand’s opportunities in the global economy. Three specific changes will stand out: • Four or five of our companies will have expressed the aspiration to be ‘global leaders’, and will be well down the path to achieving their goal. Each will have identified a slice of the global economy in which it can have competitive advantage, have developed and commercialised unique intellectual property in that slice, and be building the other intangible assets necessary to achieve global pre-eminence, including global networks, talent, management disciplines and a high performance culture • We will have a vibrant private equity market that efficiently matches foreign and local capital to innovative start-up ventures in New Zealand. Foreign venture capital will be easier to attract as a result of the burgeoning successes of our global leaders • We will have successfully negotiated critical free trade agreements, which unlock opportunities for our global leaders To facilitate these changes, we will need an underlying culture that celebrates the early successes of the global leaders and supports the next wave of global aspirants. The culture will be based on a justified belief that the spoils of success will be shared and enjoyed throughout our communities. The starting point will be a common vision for how our companies can capture global opportunities. The vision must be shared by business leaders, capital providers, the government and its agencies, labour, educational institutions, the media and the community at large. Each must understand its own role, and feel

“The catalyst for the common vision is leadership.” accountable for achieving it. Each must also trust the others to play their part. The catalyst for the common vision is leadership. The vision emerges through a concerted effort from a small but inclusive group of leaders that listen to each other, bring the same level of analysis and discipline to microeconomic and management issues as the New Zealand Institute is bringing to macroeconomic issues, and have the mana to build support for the vision among their peers. Five years will be too soon to see major changes. But leading indicators of the underlying health of the economy will be clear. The hallmark will be an all-time high in confidence, that brings with it employment growth, a continuation of the trend for our top expat talent to return, increased demand for locally produced goods and services, increased foreign direct investment and a thriving NZX (a plug for the editors of this publication).

Ian Narev is the Managing Partner of McKinsey & Company’s New Zealand office, and one of the AsiaPacific leaders of McKinsey’s global strategy practice. Ian spent the first four years of his McKinsey career in New York, after undertaking postgraduate studies in international law at Cambridge University and New York University. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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BUILDING BETTER BUSINESSES BRIAN GAYNOR BUSINESS COLUMNIST, NEW ZEALAND HERALD

The main drivers of wealth and economic growth in a free enterprise society are business people and their companies. With this in mind a number of developments are required if New Zealand is to improve its economic performance over the next five years. These include; • Our top corporate leaders need to create great companies instead of selling out and retiring to their yachts, golf courses or overseas retreats at a relatively early age. “Our top • Directors and management should adopt a more measured and longterm approach to growth. The widely adopted big bang strategy has not been successful, particularly offshore.

New Zealand companies - Michael Hill International is a good example - have been more corporate successful when they have adopted an organic growth strategy.

leaders need to create great companies instead of selling out and retiring to their yachts, golf courses overseas retreats at a relatively early age.”

• Shareholders should play an active role in ensuring that companies achieve their full potential. They should also have a longer-term perspective and reject opportunistic bids from overseas bidders.

One of the biggest problems with the New Zealand economy is that we are not creating enough great companies. We don’t have businessmen with the ambition of Rupert Murdoch of News Corporation or Frank Lowy of Westfield. Many of our successful business leaders are content to retire while still in their business prime. This is the equivalent of a successful sports coach rejecting a national position after achieving provincial success. Warren Buffett and Rupert Murdoch, who are both 74, are still creating wealth yet most of our successful entrepreneurs have much more modest goals. Our directors and management also need to take a more realistic approach to growth, particularly overseas. Too many companies have adopted the big bank approach, namely the debt financed acquisition of a large overseas company, instead of a more measured internal growth strategy.

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The only really successful offshore acquisition by a New Zealand company, prior to Fletcher Building’s recent moves in Australia, was Lion Nathan’s purchase of National Brewing. The Australian brewer was owned by the troubled Bond Corporation and Lion Nathan was able to acquire it at a large discount to underlying value.

Shareholders also need to take a more proactive stance towards management issues. It would be far more rewarding in the longer term if shareholders changed the management of a poorly performing company instead of selling out to the first foreign buyer.

The development of successful, internationally orientated companies, would be a huge boost to the New Zealand economy because they would act as an inspiration and role model to the remainder of the business community. These successful commercial enterprises are the key to the future success of the New Zealand economy as in a free enterprise environment it is private sector companies, not the Government, which creates wealth and economic growth.

In addition to being a business columnist for the New Zealand Herald, Brian is Executive Director of Milford Asset Management and Director of The New Zealand Investment Trust plc. Brian studied for B.Comm (Econ) at the National University of Ireland. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

SAVINGS, INVESTMENT AND OWNERSHIP LANCE JENKINS MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER, GOLDMAN SACHS JBWERE (NEW ZEALAND)

When NZX first asked me to put together some brief comments on a perspective for New Zealand, I was initially reticent. As someone who has been living in New York City for the past nine years I wasn’t sure I could be so bold as to put across a point of view. (I have been back in New Zealand for four months.) However on reflection, a fresh set of eyes and new perspectives as to how we approach business or the way we do things, can be genuinely helpful. As a preface to my comments I believe New Zealand is a one of the greatest places in the world. I am excited to be back, but like any business or country, there are always things we can do better to improve our lot as a society. After careful consideration, I felt it was worthwhile to focus on those issues that: • I had either observed overseas or • I felt I had some insight into (from my time spent in New York). Three key issues emerged, when thinking about opportunities for New Zealand: • The challenge of creating a culture of savings and investment • Creating a culture of self reliance, and • Celebrating our successes, our leadership and our entrepreneurs. There has been a good deal of discussion around these issues, but the need for an investment and savings culture within New Zealand stands out as arguably one of the greatest requirements for growth for our country. As someone who has spent the last nine years living in the USA, (despite press reports of a mass exodus out of NZ,

I am excited to say I returned to New Zealand with my wife and two children in January of this year) I saw first hand the benefits of incentivised retirement plans, investment plans and savings plans that are very much a part of the American psyche. Savings, Investment and Ownership are concepts that are embraced in the USA and it is no accident that the US is also one of the richest nations in the world. It is part of their cultural thread and US business and Government understand that. While the Government and opposition are currently talking about an “ownership society” the concept of a savings programme for New Zealanders seems to me to be a key requirement for future growth. David Skilling and the NZ Institute have done some very interesting work around this issue, and while not wanting to steal their thunder, their belief that New Zealanders as a whole need to embrace ownership and savings as concepts to be taken from the cradle to the grave are ideals we should all be focussed on. While we need a safety net for the less fortunate within our society, most of us function best when we feel we have an ownership stake in society. Ownership does not necessarily mean home ownership (of course it can) but the idea that we have some “skin in the game” via savings or investment is a notion that motivates the majority of us to do better and to stretch ourselves. In doing so, we not only create benefit for ourselves and our families, we also create a better New Zealand. After years of solid growth in New Zealand, we need to use this current period to develop a culture of savings, investment and ownership. If not now, we will have lost an opportunity that is unlikely to repeat itself for many years.

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By way of example, one of the great wonders I was able to witness while living in the US was the power of retirement savings and the culture of investment that not only increased the wealth of that country (as those savings and investments were able to be used productively by businesses), but also I saw first hand the wealth created by retirees and the benefits they were able to enjoy. My wife, Melissa, grew up in Cape Cod, Massachusetts, USA, and comes from a very modest background (as do I). Her father was an electrical lines repairman who spent most of his life working for the local electric utility, Cape Cod Electric, retiring two years ago as a lines foreman for that company. What was remarkable to me was seeing the wealth that her father had accumulated throughout his working life. This was a guy who probably earned no more than $50,000 in his best year, but who at the age of 60, through investing and saving throughout his working life now owned his home outright, and had a portfolio of stocks and bonds worth approx $1 million. In addition he had sent his child to a private university in Rhode Island, USA (if we think our university fees are bad in New Zealand, they are nothing compared to private universities in America!). Clearly saving and investing throughout one’s life does allow even the average earner to create wealth for themselves, and allows business to productively borrow those savings in order for the country as a whole to grow and expand. I use the example because often, when we think about savings and ownership, we assume it is for the wealthy, and clearly this is not the case. By encouraging young participants in our workforce to set aside income now and not consume it, the outcome for the individual and for the country is a large net positive. By creating a culture that understands the basic benefits of investing and saving throughout our working life is a something our country must do in order for New Zealand to grow productively. My second issue fits nicely with the creation of a savings and investment culture. It is the issue of creating a culture of self reliance. New Zealanders have long held a belief of self reliance and entrepreneurship, however while we are certainly doing well in this country, there does appear to be an underlying belief that the Government should be our first port of call for any issues we face. The reality is the Government should always be the call of last resort and that if we truly believed in a culture of self reliance, then that would be the case. My concern for New Zealand is that we as a society are all too willing to

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look to Government for relief in terms of benefits or other government handouts, instead of first looking at the source of the problem. Throwing money at an issue without fully understanding what is causing the problem is never the long term solution and it is up to us as individuals (not Government) to find our own solutions. As I have stated earlier, we need to have a safety net for those who are less fortunate, however a safety net is what it should remain, it should never become a crutch. Government has an important role to play in encouraging behaviour that adds to New Zealand and our economy, and business should work closely with Government to achieve that outcome. It is an important leadership role for Government to create outcomes that reward behaviours, and that benefit – not detract from – the economy. With an unemployment rate of 3.5%, we have a fantastic window to work on this ideal. Finally I would add while the tall poppy syndrome is slowly being removed from our thinking, we need to do everything we can do to celebrate our successes, learn from our mistakes, and encourage our leaders in business, society, and Government to make the tough decisions. As I have discovered in my previous role of managing our Goldman Sachs JBWere New York office and now working with the leadership team in New Zealand, it is always the hardest and toughest decisions that need to be answered in order for business to continue to grow and develop. By celebrating success and by rewarding leadership we develop a society that can take on the best. We need to be careful not to become too comfortable with our current solid economic state and we should take this opportunity to plan for the long term. By creating ownership and investment cultures, by creating a culture of self reliance and by celebrating success, leadership and entrepreneurship, we plant the seeds for long term success for our country. Speaking personally, it is fantastic to be back in a country that appears poised to make the tough decisions to ensure continued growth of our nation and I feel privileged to be part of it. Prior to moving into the role of Managing Director and CEO of Goldman Sachs JBWere (New Zealand) in January 2005, Lance Jenkins was President of Goldman Sachs JBWere (New York) and has been a partner of Goldman Sachs JBWere since 1999. Lance received an MBA from New York University (Stern School of Business) and has LLB and BCA degrees from Victoria University of Wellington. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

SUSTAINABILITY AND INTEGRITY PETER TOWNSEND CHIEF EXECUTIVE, CANTERBURY EMPLOYERS’ CHAMBER OF COMMERCE What are the top three things that will need to change for the New Zealand economy to be where you would like it to be in 2010?

for all employees and that linkages between educational institutions and businesses are improved markedly.

• A significant shift across New Zealand with respect to an understanding of the linkage between sustainable, profitable business, community wellbeing and individual welfare. Business success and people who are successful in business need to be appreciated and lauded. We need a platform of sound and stable public policy on which to build an environment conducive to business success.

• We need to start thinking about infrastructure issues strategically and long-term plans need to be developed with regard to provision of efficient transport. It’s time to get real about the future of electricity supply, transmission and conservation in this country and develop a workable long-term plan. With respect to water we need to ensure the tension between hydro-electric generation, irrigation, recreational, the enhancement of rivers, industrial use of water and town supply are worked through in the best interests of the overall community and we need to look at the tradability of water rights.

• Ensuring that as many New Zealanders as is possible are in useful, productive, well-paid work so that we can better harness the human resource capacity, increase productivity and sustainably grow the economy at a rate that will markedly increase per capita income. This will enable us to better apply technology to our natural capital to create value. • Do a lot better in respect to our infrastructure and utilities supply. Overcome the issues of increasing congestion in our cities, improve the road/rail/shipping between our cities and ensure that we have adequate supplies of reasonably priced electricity and water to support our growing economy. What would need to happen in order to facilitate these changes?

• Every politician at a local and central Government level must prioritise working on an environment that will encourage sustainable, profitable business. We need to eliminate the cringe syndrome in New Zealand with respect to business and we need to ensure that businesses are operating on a platform of sustainability and integrity so that good business practices are seen to be the norm in this country. We also need to celebrate our business successes. • We need to encourage family-friendly workplaces and a flexible, high quality labour relations environment. We must reinforce a real commitment to, and belief in, good educational outcomes and celebrate the importance of productive work in our economy. We must ensure that there is provision for continuous upskilling and training

How would these changes impact the economy?

• Understanding the role that business plays in sustainable economic growth and what the raising of our per capita income will mean to all of us will reinforce the chance for business to succeed. The connection is compelling; it is just not understood. • New Zealand is lagging in terms of its productivity and its per capita income. We must break out of the position of being a low wage economy if we are to offer a reasonable standard of living to all of our citizens. Increasing the contribution to the economy, made by human capital, is fundamental. • No economy can grow on suspect infrastructure. There is not much point talking about innovation and future growth if the wheels are falling off your infrastructure.

Peter Townsend has been the Chief Executive of the Canterbury Employers’ Chamber of Commerce since 1996. Peter also holds several corporate directorships and is heavily committed to a range of community groups and initiatives in this region that are in harmony with the objectives of the Employers’ Chamber. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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SELF DETERMINATION, SELF RELIANCE D r. R O D E R I C K D E A N E C H A I R M A N, TELECOM NEW ZEALAND

What are the top three things that will need to change for the New Zealand economy to be where you would like it to be in 2010?

• Deregulation rather than re-regulation. • Lower taxes and reduced size of government. • Upgraded social policy (education, health, social welfare).

• More vibrant, faster growth economy. • Better solutions to social challenges. We also need to solve our massive infrastructure problems (e.g. roading and electricity), which essentially need more market oriented solutions. These currently constrain growth and increase risks for the private sector.

What would need to happen in order to facilitate these changes?

• Government stops pretending it has all the solutions for all our problems. • More self determination, more self reliance. • More market oriented solutions. How would these changes impact the economy?

• Greater productivity growth arising from restoration of flexibility and adaptability.

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Dr. Roderick Deane is currently Chairman of Telecom, Fletcher Building Limited, ANZ National Bank Limited, Te Papa Tongarewa (the Museum of New Zealand) and the New Zealand Seed Fund. Dr. Deane is also a Director of the Australian companies, Australia and New Zealand Banking Group Limited and Woolworths Limited. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

BUILDING A NATION ON

PRIDE AND PASSION C HR I S MO L LE R C H I E F E X E C U T I V E O FFIC ER , NEW ZE AL AND R UGBY UNIO N

From the outset I plead guilty to parochialism and bias, given the organisation that I represent; however, I fervently believe that New Zealand must change its attitude to hosting major international events. The economic impact of hosting, for instance, Rugby World Cup 2011 would be to generate hundreds of millions of dollars of net foreign exchange earnings for the country and create a further multiplier effect right through the New Zealand economy. In addition it would provide the opportunity to showcase New Zealand to the world. Following the 2000 Olympics, Sydney became, and still is, the event capital of the world. But it is about much more than just money and PR. It concerns our national psyche and identity – our pride, our passion and our belief in ourselves as a nation to achieve the impossible. In all aspects of life, if we had an attitude of shooting for the stars, but only landed on the moon, our achievements as a country and the resultant flow on effect through the economy, would be staggering. Indeed it would be a virtuous circle of achievement generating wealth, of reinvesting part of that wealth to achieve again at even greater heights, which in turn would produce more wealth and so on. Against this background the single most important ingredient for successfully bidding for and winning the right to host major events is a “can do” attitude. As the adidas by-line says “impossible is nothing”. It also requires central and local government to take a leaf out of the book of Mayor Kerry Prendergast and her fellow Wellington City colleagues to recognise that the benefits of event management principally flow to the host country and cities, with the event itself typically breaking even at best.

In summary my top three things that need to change for the New Zealand economy to be where it should be in 2010 are to: • embrace event management with a passion, • adopt a “can do” attitude as country through harnessing all aspects of our national identity and • ensure our education system assists the youth of today to become the leaders of tomorrow.

Chris Moller took up the position of CEO of the New Zealand Rugby Union on 30 January 2003. Prior to this, Chris was the Deputy Chief Executive of Fonterra and Managing Director of NZMP. Chris is a graduate of Victoria University of Wellington and has also attended the London School of Economics and the Advanced Management Programme at INSEAD in France. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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PRODUCTIVITY = POWER SCOTT ST JOHN CHIEF EXECUTIVE OFFICER, FIRST NZ CAPITAL

The growth of a nation’s wealth is determined by productivity. This involves working smarter, and getting more out of our resources. This could be promoted by creating incentives to train workers, apprenticeships, and tax deductibility for worker training. New Zealand also needs the best ideas and technology the world has to offer. Trade distortions should be removed, and immigration policy should have a greater bias towards skill based targeting. Higher productivity growth would deliver stronger economic growth, with less inflation pressure, creating a richer nation overall.

Infrastructure

Years of under investment needs to be corrected. Government recognises this, however the imperative of change must be maintained. In particular, transport and energy must be addressed. The regulatory framework should be re-evaluated to look for bottlenecks to progress. Is the Resource Management Act working effectively, or is it an unconstructive influence? Labour bottlenecks can be remedied through immigration and training incentives. Private sector investment, or government/private sector joint ventures should be welcomed. As a consequence, the economy and businesses would run more smoothly. Savings and Asset Accumulation

Encouragement of Savings in New Zealand currently has some traction. The work of The New Zealand Institute on household savings or the lack of, has highlighted the importance policy as a lever to promote savings. The Government is embracing the issue with the Stobo report on taxation of investments, and the Harris report on workplace savings. These both appear likely to receive attention in the May budget.

Strengthen Incentives

To Move From Welfare To Work: The OECD recently recognised this as a priority for New Zealand. Too many New Zealanders rely on public income support, and are receiving mixed signals as to how to emerge from this reliance. This is largely achieved via tax policy. As it stands, the difference between workers increasing their take home pay, and potential loss of welfare support is not compelling enough. A higher workforce participation rate must also be achieved. New Zealand’s aging population will see labour force growth moderate. Arresting this trend is important for growth.

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Most particularly, New Zealanders must reduce their reliance on offshore capital. Higher quality savings, with better asset allocations should see the savings directed to areas it is needed most. The consequence of this is to grow the overall wealth of the nation.

Scott was appointed Chief Executive Officer of First NZ Capital in 2002. His experience in the finance industry is extensive and includes roles as a Senior Equity Analyst, Equity Salesman, Head of Equity Sales and Head of Equities. Scott joined First NZ Capital’s predecessor company CS First Boston in 1993 following seven years at Hendry Hay McIntosh. The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

FROM THE HEARTLAND THE VIEWS OF NEW ZEALANDERS “In five years time I will have graduated with a commerce degree majoring in finance, and a physics degree. Also I will have a student loan which I will be looking to start paying off. I will be faced with the decision of going overseas and gaining experience or staying in New Zealand and begin paying off my student loan. For me to want to stay in New Zealand the New Zealand economy must be in a strong position. For me, this would mean businesses must be expanding and looking to employ young graduates. Also the Government must ensure there are incentives for young graduates to stay in New Zealand between now and 2010 to help strengthen the economy. Good, well paid jobs for young graduates will only come when New Zealand businesses are doing well and expanding. Also, for me, I am interested in investing money in the stock market. I will be faced with a decision on which economy to invest my money in. For me to choose New Zealand in 2010 it will be its past performance which I will be basing my opinion on. If between now and 2010, the New Zealand economy does well it will gain the attention of young investors like myself. So, for me, the three important things New Zealand needs to do between now and 2010, are to ensure young graduates are encouraged to stay in New Zealand and work off their student loan, New Zealand businesses do well and expand to create well paid jobs for young graduates and also for the New Zealand economy to be a good healthy option for young investors to invest in.” Montague Hare, Commerce & Science Student, Canterbury University, 18 years.

“I’m an investor in equities because I believe the stock market can provide a good return for someone like me, with a long-term view. But I’m also a member of the community I live in, and my take on the economy reflects that. I love the fact that New Zealand has one of the lowest unemployment rates around. It means my neighbours, my friends and I are more likely to have decent jobs – and the confidence to put some money into savings and investments. In the future, I’d like to see our full employment goal broadened to include a real push for more productivity and higher skills – so companies can afford to pay better wages as well as delivering decent profits. I believe our success depends on our ability to build value through innovation and great New Zealand brands that can take on the world. Commodities are important, but only as the raw ingredients. I’d love to see us develop an economy that reflected that.”

“Here is my wish list for New Zealand in 2010; •

The number of current MP’s reduced to at least half the present number

•

A complete overhaul of WINZ, with only the legitimate beneficiaries being catered for

•

A substantial reduction in overseas debt

•

A severe reduction in compliance costs

•

An ANZAC currency scheme for use by New Zealand and Australia

•

A realistic, but much cheaper, Defence Force

•

An independent traffic department with its own budget

•

A criminal justice system operating with sensible sentencing culture

•

An overhauled and properly administered employment contracts process.”

Bill Brien, former Police Officer, Chairman of Wellington Museums Trust.

“New Zealand is all about people and places. We have to do all we can to ensure we keep our talent here and keep them motivated to be clever and inspiring. We must ensure we are creating a country and economy that will provide young people a place to live, work, and a place that is competitive with international standards. This is about protecting our future. Our people create products and places for New Zealand to attract world currency. Let’s make sure we think about the ‘brain drain’ and work hard to afford the right opportunities to young New Zealanders so they want to stay here and build great companies.” Dianne Jones, Gardener, 53 years.

“New Zealanders have to “think bigger”. Transport, telecommunications and energy production all need some serious attention if we want to keep our economy growing. Control of this crucial infrastructure needs to be brought back into New Zealand and appropriate public money invested to ensure future economic growth is not constricted.” Davin Murdoch, Business Owner, 38 years.

Matt Bostwick, Marketing Communications Manager, 31 years.

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ABN AMRO INSTALMENT WARRANTS A VEHICLE FOR ACCELERATING WEALTH CREATION AARON MILNE DIRECTOR, ABN AMRO EQUITIES NEW ZEALAND LTD

Much has been written of New Zealand retail investors’ enduring love affair with real estate. Whilst exploring some of the reasons for this popularity, this article will also look at whether ABN AMRO Instalment Warrants can offer the same potential for accelerating wealth creation. The father of modern security analysis, Ben Graham, stated “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting those requirements are speculative.”1 With this in mind, we can explore the relative merits of investing in real estate against equities. The case for investing in residential real estate is well understood by New Zealand retail investors and is evidenced by nominal house price inflation of 10% pa since 1963.2 Aside from steady capital returns, what are the other factors that make real estate so popular with New Zealand retail investors? Probably the single most important factor is an appreciation that leverage is an integral part of any strategy for creating wealth. The potential to generate significantly higher investment returns through the use of leverage is best demonstrated using a simple example. Assume two investors purchase a similar residential rental property for $200,000, however one investor borrows $150,000 to help fund the purchase. Further, assume both properties appreciate 5% pa for the next three years. As outlined below, Investor A earns a 15.7% return on the $200,000 equity they have invested. Investor B however earns a 63.1% return on the lesser amount of $50,000 they have invested.

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Investor A

Investor B

Purchase Price of Property

$200,000

$200,000

Equity Invested Bank loan

$200,000 $0

$50,000 $150,000

Registered Value (after 3 years)

$231,525

$231,525

15.7%

63.1%

Return on Equity Invested*

* For simplicity, the return calculations above ignore any funding costs associated with the loan, as well as the effects of rental income.

It is also relevant to consider the unique tax environment in New Zealand. The example above does not take into account funding costs, however it is important note the deductibility of interest costs incurred in generating assessable income. This, coupled with the absence of a capital gains tax in New Zealand, has led retail investors to embrace the notion of negatively geared investment properties. Interestingly, investor willingness to borrow is matched by the willingness of banks to lend against residential real estate. In conjunction with record low interest rates, these factors have helped fuel the property boom in New Zealand and other developed countries over the past few years.

The question at this point is whether the principles outlined can be applied just as successfully to leveraged investing in the equity market? The good news is yes, and Instalment Warrants have been designed with these concepts in mind. The recent introduction of Instalment Warrants offers retail investors access to one of the most popular investment products in Australia. Since January 2001 to mid 2004, turnover growth in Instalment Warrants listed on the ASX has been 63% pa with turnover now exceeding $2.1 billion pa. Similar to purchasing residential real estate with only partial capital outlay and borrowing the rest, Instalment Warrants allow investors to buy blue chip NZX shares by way of two separate payments. In practice, the investor pays approximately half the value of the share up-front and borrows the rest from the Instalment Warrant issuer. As with any loan, the investor is liable for interest costs which in the case of Instalment Warrants are paid up front and represent a part of the initial payment. The popularity of Instalment Warrants in Australia can be explained by the following factors: • Leveraged exposure to the share price of the underlying equity

New Zealand equities have posted gross average annual returns of 12.8% since 1932. Due to the lack of directly comparable figures in New Zealand, it is difficult to make a case that long run equity returns exceed those of residential real estate. Research findings overseas, however, confirm that equities typically outperform other asset classes such as property, bonds and cash over the long term. The high gross dividend yields on offer in the New Zealand equity market are amongst the highest in the world, with 8% – 10% gross dividends not uncommon. As a consequence Instalment Warrants will typically be positively geared, meaning dividend income will exceed the funding costs. In this light, it is interesting to consider that average rental yields are seldom above 5% once maintenance costs, rates, insurances, management fees etc are taken into consideration. To conclude, the purpose of this article is not to detract from investment in residential real estate. For the reasons outlined above, it is has proven a compelling investment class in a New Zealand context. Rather, leverage and specifically Instalment Warrants issued over NZX shares should be viewed as an equally powerful tool for accelerating wealth creation. Importantly, often with superior returns.

• Full entitlement to dividend and imputation credit income (for only partial capital outlay) • Full deductibility of interest costs for tax purposes. Unlike Australia, however, New Zealand investors are generally not liable for capital gains tax on the sale of Instalment Warrants. • Built-in downside protection arising from the fact the investor does not have to repay the loan regardless of the underlying entity share price performance. As noted, the test for any investment should be safety of principal plus the likelihood of an adequate return. To this end, it is imperative that investors focus on established blue chip companies operating in healthy industries. To borrow a real estate analogy, blue ribbon areas tend to experience less volatility in a downturn but also perform more strongly in an upswing. The same principle generally applies to equities.

1

Ben Graham & David Dodds (1934) Security Analysis

2

Mary Holm (1998) The Real Story: Saving and investing, now inflation is under control (commissioned by the RBNZ)

3

ASX (September 2004) – Investment Strategies Using Instalment Warrants

4

ABN AMRO Research (May 2005) In the long run…..2004 Update

The views represented in this article are the express views of the author, and do not necessarily reflect the views of NZX.

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DIRECT MARKET ACCESS (DMA) ADRIENNE QUINN NZX PARTICIPANT RELATIONS MANAGER

Liquidity, as everyone knows, is the lifeblood of markets. A recent review of global markets, conducted by NZX, indicates that a significant level of liquidity is driven by investors and traders who use Direct Market Access (DMA). DMA was introduced into New Zealand by NZX in August 2004 and provides accredited DMA NZX Firms with the ability to offer both existing clients and a much broader range of new clients, both domestic and international, the opportunity to place orders directly into the New Zealand marketplace.

Who uses DMA?

In order to introduce DMA, NZX has made a significant technology and regulatory investment. To date 10 NZX Firms have been accredited and the trading volumes are starting to grow. Figures quoted in our Market Update on page 29 show that 24.5% of all trades in March came from orders placed through DMA.

NZX believes the benefits of DMA are very large in terms of growing market participation, overall liquidity and increased information flow. The most immediate benefit will be an increase in the diversity of market participation. DMA enables direct trading activity and participation from a wider range of retail and professional participants which has, until now, not been available. For example, National Bank recently formed an alliance with First NZ Capital Securities to implement DMA for their retail banking customers. This means that any order placed into the National Bank online share trading platform by banking customers can now be automatically submitted straight to market via a DMA application as opposed to being manually routed into the market by an individual working for an NZX Firm.

The following outlines more information on this exciting market enhancement and how NZX expects this will develop and grow the overall liquidity of our marketplace. What is DMA?

Up until late last year NZX Trading Participants, or more specifically a FASTER Dealer, would have to key in orders to a proprietary NZX Trader Workstation (TWS) in order to get orders into the Market. This is a manual process which is both slow and limiting in terms of volume and capacity. With DMA, NZX Trading Participants are now able to place orders to buy and sell shares and other securities directly into the New Zealand market, via specially designed software applications. This software is technically confirmed by NZX in order to confirm its technical efficiency in the market. (The software application can reside on the desktop of an NZX Advisor working within an NZX Firm, or on the desktop of a client authorised by the firm to have direct access to the markets.)

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DMA is used by a variety of market participants and investors to enter orders into the market and to access information directly from the trading engine. NZX Firms are able to provide many of their institutional and even larger retail customers with the ability to enter orders straight into the NZX trading engine, without human intervention. What are the benefits?

What are the risks? If an order comes directly from a customer, who monitors the order flow?

The order is monitored by an accredited DMA Dealer within a participating NZX Firm. The Dealers and Firms have undertaken tests with NZX to demonstrate they are technically proficient in using DMA and are bound by the NZX Participant rules relating to DMA. NZX is able to monitor order activity and flow, and if there are any concerns, NZX has the ability to turn off the access to the NZX Trading System via the DMA application until the issues are resolved.

Why would an investor or fund manager want to switch to DMA when they already have a good relationship with their NZX Advisor?

There is no need for the relationship between the investor and their NZX Advisor to change that much due to the introduction of DMA. NZX Firms will simply be able to execute orders more quickly and easily on behalf of their clients, through having multiple inputs for market orders. NZX Firms will also, at their discretion, be able to give some clients authorisation to enter orders directly into the market. Who is using DMA applications?

Since the introduction of DMA in August 2004, 10 of NZX’s 16 Trading Participants have now been accredited to make use of DMA within their firms. These Firms are: • CitiGroup Global Markets (NZ) Limited • ABN AMRO New Zealand Ltd

What is an Independent Software Vendor (ISV)?

An ISV provides technically conformed software to NZX Participants, to enable DMA. The role of an ISV is to provide varying features and functionality to enhance trading. NZX currently have two accredited NZX ISVs (IRESS and SecuritEase). Will we see more ISVs entering the NZ Market?

NZX would like to see more ISVs develop open interfaces solutions to NZX, especially those from overseas marketplaces which will facilitate more international order flow. ISV applications play a critical role in offering an entire product suite to help NZX, NZX Firms and the trading community work smarter. To ensure that all ISVs software is compliant, NZX mandates that ISV applications undertake a technical conformance to meet the minimum requirements defined by NZX to support DMA.

• Macquarie New Zealand Ltd • Goldman Sachs JBWere (NZ) Ltd • First NZ Capital Securities Limited • Forsyth Barr Ltd

For more information on DMA trading, please contact

• Deutsche Bank Securities New Zealand Ltd

Adrienne Quinn, NZX Participant Relations Manager, at [email protected]

• Direct Broking Ltd • UBS New Zealand Ltd • ASB Securities Ltd How many trades application?

are

implemented

via

a

DMA

One quarter (24.5%) of all trades on NZX markets in March 2005 were the result of orders placed through a DMA application. NZX expects this to continue to rise as Participants increase their use of DMA trading facilities. What other countries have DMA? Did NZX look at these examples?

Most exchanges globally take advantage of Independent Software Vendor (ISV) applications. All the exchanges NZX researched when preparing to bring DMA to the New Zealand market had seen positive results on the back of DMA implementation and overall growth in liquidity and participation.

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SMARTSHARES LAUNCHES SAVINGS PLAN Over the last 18 months there has been a growing level of discussion on New Zealanders’ savings habits. especially regarding our rate of savings and our attitudes towards savings.

Regular savings directly into Smartshares - what a difference it could make! $16,000 $15,000 $14,000 $13,000 $12,000

A recent survey of all Smartshares investors revealed a great deal of interest in saving directly into the sharemarket in a simple and easy manner. Most investors, especially those with little time or money, find it difficult to make regular investment decisions. Finding a solution was a ‘no brainer’ for the Smartshares team who recently launched the new Smartshares Savings Plan across all the products - TENZ, MIDZ, FONZ and MOZY. The plan enables investors in Smartshares to make monthly contributions directly into Smartshares at no cost.* The minimum contribution is just $50 per month with the flexibility to stop, restart, increase or decrease savings amounts at any time. One of the great advantages for first time investors is that it provides a low cost, easy way to invest in the sharemarket. It allows people to decide in advance how much they want to save, pay by direct credit into the Smartshares fund of their choice, and forget about it. It is hoped that this initiative will also increase sharemarket participation amongst New Zealanders who currently lag far behind Australians in this area of savings. Industry commentators have been very supportive of the Smartshares Savings Plan to help the first time investor. Mary Holm, a prominent business writer for the New Zealand Herald stated recently “…It’s a particularly good way to invest via a share fund – which is the best higherrisk, higher-return vehicle for those with a small amount of money.” Our example here illustrates how a modest contribution of $100 per month into Smartshares can help a first time investor reach their investment goals sooner.

26

$11,000 $10,000 $9,000 $8,000 $7,000 $6,000 $5,000

Year 0

Year 1

Year 2

$5,000 base amount invested + $100 a month (net of tax)

Year 3

Year 4

Year 5

$5,000 base amount invested (net of tax)

Please note this graph is for illustration only and does not provide any views to the possible returns of Smartshares. This example assumes a gross return of 10%pa over five years based on 6% dividend yield and 4% capital gains (all dividends reinvested net of tax).

This scenario shows that an investor would have $14,541 in their Smartshares fund in five years, starting with an initial $5,000 investment and adding just $100 each month, through the Smartshares Savings Plan. If the investor were to contribute $200 per month this investment would grow to $21,736 reaching their investment goal even faster.

Units in TENZ, MIDZ, FONZ and MOZY Smartshares have been accepted for quotation by New Zealand Exchange Limited and will be quoted upon completion of allotment procedures. However, the Special Division that regulates NZX Funds Management Limited takes no responsibility for any statement in this advertisement. *The 25 cent transaction fee as outlined in the Investment Statement is currently being waived by NZX Funds Management Limited.

JOINING THE SAVINGS PLAN To join the plan, Smartshares investors simply need to order an investment statement from the Smartshares website (www.smartshares.co.nz) or call 0800 80 87 80.

smartshares

NZX Operating Metrics - Quarter 1 2005 NZX metrics are available on a monthly basis and can be found at www.nzx.com/aboutus/investor/metrics

MARKET CAPITALISATION ($m)

INDICES Q1

Change

% of GDP

Q1

Change

All Domestic Equity

63,246

17%

52%

NZSX 50 Index

3,039

17%

NZSX

62,791

16%

51%

NZSX 50 Portfolio Index

1,662

20%

NZAX

455

109%

n/a

NZSX 15 Index

5,617

17%

NZDX

6,549

9%

5%

NZAX ALL Index

1,202

17%

Q1

Change

Q1

Change

NZSX

154,248

13%

NZSX

137,640

11%

NZDX

4,970

-23%

NZDX

3,854

-24%

NZAX

1,275

152%

NZAX

1,267

151%

Total

160,493

12%

Total

142,761

10%

Daily avg

2,675

15%

Daily avg

2,379

14%

Direct Market Access

35,553

n/a

Q1

Change

Q1

Change

NZSX

6,633

15%

NZSX 10 Index

55%

5%

NZDX

387

-24%

NZSX 50 Index

41%

-6%

NZAX

7

193%

NZSX All Index

39%

-4%

Total

7,027

12%

117

16%

Q1

Change

TRANSACTIONS - NUMBER

TRANSACTIONS - NUMBER ‹ $50k

TRANSACTIONS - VALUE OVERALL ($m)

TRANSACTIONS - ANNUALISED VELOCITY

Daily avg

ORDER NUMBERS

Daily avg

ISSUERS

229,497

8%

3,825

12%

PARTICIPANTS Q1

Change

Added YTD

Companies

Q1 Trading & Advising Firm

16

NZSX Domestic

141

4%

0

Advising Firm

11

NZSX Dual Full

3

50%

0

Delivery & Settlement Participants

18

NZSX Overseas

55

-4%

0

FASTER Participants

2

NZAX

22

83%

0

Futures & Options Participants

5

NZDX

42

11%

0

Sponsors

40

Securities Debt

85

5%

1

ETFs

6

50%

0

Warrants

8

-20%

0

Q1($m)

YTD ($m)

Primary Data Distributors

18

New equity raised

$487

$487

Real Time Data Terminals

6,944

New debt raised

$152

$152

SMARTSHARES

MARKET DATA Q1

LINK MARKET SERVICES Q1

Change

Funds Under Management ($m)

181

114%

Total Issuers

114

Q1

Holders

10,506

157%

Listed Issuers

71

Number of Funds

4

300%

NOTES: 1. All figures are measured at the end of the last trading day or for the duration of the quarter. 2. Change refers to the change since the same period in the previous year 3. All Domestic Equity Market Capitalisation includes all securities quoted on the NZSX and NZAX markets of New Zealand, Incorporated Issuers and Dual Listed Issuers. The Market Capitalisation of Dual Listed Issuers is calculated according to the proportion of revenue generated in New Zealand. 4. Market Capitalisation for the NZDX is the total nominal (face) value of all quoted securities excluding New Zealand Government Stock. 5. Number of Direct Market Access trades includes any trade that involves at at least one Direct Market Access side 6. The number of orders is the number of new orders. It does not represent any ammended orders nor does it consider the number of trades that results from it.

27

MARKETPLACE Quarter ended 31 March 2005

Trades on all NZX markets Top 10 - by value of trades ($M)

• Macquarie Goodman Property Trust embarks on a capital raising of $231 million via a placement, institutional book build, and entitlements offer to existing shareholders. The funds will be used to acquire a portfolio of property assets from Macquarie Goodman Group. • Tower Ltd completes a scheme of arrangement to distribute shares of subsidiary Australian Wealth Management to all shareholders. • Tenon delivers a capital repayment of $321 million to shareholders. The distinction between Tenon Ordinary and Tenon Preference shares is removed. • Wrightson completes a full takeover of rival rural services company Williams & Kettle. Williams & Kettle is delisted. • AMP acquires 10% of Capital Properties NZ via a stand in the market. NZX FIRMS The increase in trading activity has allowed most NZX Firms to increase their absolute trading turnover compared to Q1 2004. The biggest increases in market share were recorded by ABN AMRO NZ, Macquarie and Forsyth Barr (in terms of value traded) and by First NZ, ASB Securities and Direct Broking (in terms of number of trades). The market share statistics for NZX Firms on all NZX’s markets this quarter were:

Firm

Value

(%)

Firm

Trades

(%)

Q1 04 (%)

First NZ

1,387

19.7

(22.1)

First NZ

27,511 17.1

(15.7)

GSJBWere

1,207

17.2

(22.0)

ABN AMRO Craigs

20,293 12.6

(12.7)

UBS

883

12.6

(14.6)

GSJBWere

18,283 11.4

(10.4)

ABN AMRO NZ

856

12.2

(9.3)

ASB Securities

18,205 11.3

(8.6)

Macquarie

786

11.2

(7.1)

Forsyth Barr

17,653 11.0

(12.3)

Citigroup

745

10.6

(9.5)

Direct Broking

15,304

9.5

(6.3)

Forsyth Barr

494

7.0

(5.7)

Macquarie

12,979

8.1

(6.8)

ABN AMRO Craigs

301

4.3

(3.6)

UBS

8,405

5.2

(4.4)

ASB Securities

160

2.3

(1.8)

ABN AMRO NZ

7,883

4.9

(4.9)

Direct Broking

129

1.8

(1.5)

Citigroup

6,495

4.0

(4.6)

GLOBAL INDEX RETURNS Global markets, as measured by the MSCI Indices, showed mixed returns this quarter. The Australian market withstood a weak March to give an overall positive return for the quarter. Pacific and European markets were also up, but the strengthening of the New Zealand dollar against the Yen and Euro dampened the returns available from these markets in New Zealand dollar terms.

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MAJOR MARKET EVENTS • Fletcher Building Ltd raises $141 million in an institutional book build, to fund the acquisition of Amatek Holdings Ltd in Australia.

Top 10 - by number of trades

Q1 04 (%)

DIRECT MARKET ACCESS A major development for NZX this quarter has been the uptake of Direct Market Access (DMA) by NZX Firms. DMA has opened the way for the development of software that interacts directly with NZX’s trading system. This new technology allows the streamlining of order processing at NZX Firms and the implementation of automated algorithmic trading. DMA makes it easier for participants to access the markets, which will have positive spin-offs in terms of liquidity, demand for New Zealand securities and new listings.

NZSX MARKET - TRADING ACTIVITY Trading activity on the NZSX Market has been up this quarter. February and March 2005 were the two busiest months since 2001 in terms of the number of trades (2806 and 2675 average trades per day respectively). Value of trading was also high, averaging over $114 million per day in both February and March.

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In March 2005, 14,300 trades were executed using DMA technology (with a DMA order on the buy side, the sell side or both sides). This represented 24.5% of all trades in March. The value of DMA trades in March 2005 was $114 million, 4.6% of total value traded. Thus far DMA has been used mostly in environments where there is a large volume of small value trades. If we consider only on-market equity trading (i.e. excluding debt trading and off-market negotiated deals), DMA activity accounts for 29.4% of the number of trades and 15.4% of value traded in March.

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NZSX MARKET – TOTAL RETURNS The market retreated slightly in the March 2005 quarter, on the back of weakening macroeconomic indicators and a small number of below expectation profit announcements in March. This quarter is the first time the NZSX 50 Index has delivered a negative quarterly return since March 2003. The market is still well above its 2004 levels. 12 month returns for the NZSX Indices vary from 14.0% for the NZSX 10 Index to 29.4% for the small-cap NZSX SCI Index.

29

NZSX 50 Index

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Top 10 Positive Contributors

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Security

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Index weight (%)

Last price ($)

Q1 05 Return (%)

Q1 Index impact (points)

12 Month Return (%)

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Independent Newspapers

4.20

6.00

7.16

8.58

27.3

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Fletcher Building

6.50

6.64

3.48

6.95

60.6

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Auckland Intl Airport

5.47

8.10

4.28

6.84

30.0

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Telecom Corp of NZ

26.06

6.06

0.72

6.05

14.1

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Waste Management NZ

1.35

6.12

12.50

4.67

45.7

Pumpkin Patch

0.77

3.28

20.88

4.04

-

Contact Energy

8.29

6.50

1.56

3.45

23.8

The Warehouse Group

1.31

3.97

9.37

3.31

-2.8

Sky Network TV

1.25

6.43

7.49

2.70

25.9

Mainfreight

0.38

2.65

17.78

1.71

56.2

Index weight (%)

Last price ($)

Q1 05 Return (%)

Q1 Index impact (points)

12 Month Return (%)

F&P Appliances Hdgs

1.73

2.97

-30.93

-23.16

-26.6

F&P Healthcare Corp

3.36

2.99

-7.72

-8.46

32.4

Sky City Entertainment

4.55

4.92

-5.34

-7.80

21.1

Tower

1.26

1.77

-16.29

-7.22

16.3

Carter Holt Harvey

5.70

1.97

-3.02

-5.58

-20.7

Promina Group

2.13

5.45

-6.03

-4.10

31.8

Nuplex Industries

0.81

4.97

-12.06

-3.44

18.1

Guinness Peat Group Plc

3.08

2.08

-3.02

-2.96

14.6

Lion Nathan

0.54

7.84

-15.43

-2.96

17.4

Cavalier Corporation

0.40

3.80

-16.71

-2.47

-15.9

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NZSX Market - Total Index Return Index

Value

NZSX 50

3039.08

Q1 2005 (%) -0.8

12 Months (%) 17.2

NZSX 15

5617.40

-1.1

17.4

NZSX 50 Portfolio

1662.01

-1.7

20.0

NZSX 10

3316.06

-0.6

14.0

NZSX MidCap

6540.44

-0.6

23.7

NZSX SCI

19485.24

-2.1

29.4

NZSX All

3158.99

-0.8

20.3

NZSX 50 INDEX Of the 50 securities in the NZSX 50 Index, 23 gave a positive return this quarter. Overall, the NZSX 50 Index fell by 0.8%, or 25.8 index points. The securities which had the biggest impacts on the Index were Independent Newspapers (which pushed the Index up 8.6 points), Fisher and Paykel Appliances and Fisher and Paykel Healthcare (dragging the Index down 23.2 points and 8.5 points respectively). The poorer performing securities this quarter were mainly stocks that have given strong returns over the past year. Of the bottom 10 negative contributors this quarter, seven have still given positive 12 month returns, all in excess of 14%, despite their poor performance this quarter.

30

NZSX 50 Index Bottom 10 Negative Contributors Security

NZSX SCI INDEX There were a number of strong performers among the smallcap stocks this quarter. NZ Finance Holdings, which listed after an IPO in October 2004, doubled in price this quarter, partly due to popularity with strategic shareholders. NZSX SCI Index Top 10 Performers Security

Last price ($)

Q1 05 Return (%)

12 Month Return (%)

NZ Finance Holdings

0.82

105.0

-

Training Solutions Plus

0.002

100.0

0.0

Vertex Group Holdings

2.06

31.2

54.1

NZ Refining Co

34.50

17.8

145.9

CDL Investments NZ

0.37

15.6

48.0

Cadmus Technology

0.30

15.4

160.9

Metlifecare

3.90

14.1

72.6

Allied Farmers

2.88

13.7

92.1

Toll NZ

3.05

13.0

117.9

Mooring Systems

4.45

12.7

18.4

NZAX Market – Total Returns

NZSX SCI Index

Bottom 10 Performers

Bottom 10 Performers Last price ($)

Q1 05 Return (%)

12 Month Return (%)

Security

Last price ($)

Q1 05 Return (%)

Six Months (%)

New Image

0.07

-64.8

-77.6

RetailX

0.08

33.3

-60.0

Widespread Portfolios

0.017

-39.3

-37.9

Livestock Improv Corp

1.30

20.6

10.9

Genesis R&D Corp

0.28

-37.8

-56.9

Just Water International

0.94

20.4

23.5

Apple Fields

0.03

-33.3

0.0

Ashburton BS Ordinary

4.30

12.9

25.9

Life Pharmacy Limited

1.35

-32.5

-3.6

Wool Equities

0.72

12.5

50.0

Broadway Industries

0.80

-28.6

-16.8

Comvita

2.20

6.1

-7.1

Aust Prop Hldgs Group

0.03

-28.6

-40.0

Eastern HiFi

0.96

4.3

-

KidiCorp Group

0.18

-28.0

0.0

Loan and Buildng Society

4.56

3.6

16.8

Blue Chip New Zealand

0.90

-25.0

-44.4

Ashburton BS Preference

1.26

1.5

15.5

Heritage Gold NZ

0.083

-24.5

-16.2

Oyster Bay Mlb Vineyards

2.74

1.5

2.6

Speirs Group

1.20

0.0

37.4

Satara Co-op Group

1.18

-2.3

-

The NZ Wine Company

1.90

-5.0

-2.3

NZ Wool Services Intl

0.50

-7.4

-4.9

Zintel Group

1.00

-9.1

-18.9

Seeka Kiwifruit Inds

4.50

-9.6

-0.6

Southern Travel Holdings

1.08

-11.3

-

Cynotech

0.22

-15.4

50.4

Windflow Technology

2.50

-16.7

-20.4

Connexionz

0.50

-24.2

-

Solution Dynamics

1.08

-32.5

-10.0

A2 Corp

0.22

-45.0

-56.0

The CACI Group

0.18

-50.0

-47.1

Security

NZAX MARKET - TRADING ACTIVITY The NZAX Market has matured significantly since its launch in November 2003. There are now 23 Issuers with securities listed on the market. The growth in the market can be seen in the number of trades and value of shares traded, which are up 150% and 190% respectively this quarter as compared to the same period in 2004. ���������������������������������� ����

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NZAX ALL INDEX The NZAX All Index followed the NZSX Market indices down this quarter, down 4.5% to 1202.21. The 12 month return on this in Index is 17.3%.

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NZAX MARKET - TOTAL RETURNS The following table highlights the growth in value generated for shareholders of NZAX securities for the past quarter and the previous six months.

31

NZDX MARKET - TRADING ACTIVITY Trading on the NZDX Market has been moderate this quarter.

NZX DEBT INDICES NZX calculates a range of government bond, corporate bond and bank bill indices designed to track the performance of fixed interest securities in New Zealand. The table below shows the performance of the main indices to the end of March. NZX Debt Indices - Returns Returns Index

12 Months (%)

Yield (%)

Mod. Duration

NZX NZ Government Stock Index

0.53

3.86

6.24

4.04 years

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NZX Corporate Investment Grade Bond Index

0.76

4.49

7.13

2.50 years

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NZX 90-Day Bank Bill Index

1.65

6.42

7.08

n/a

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NZDX MARKET - NEW LISTINGS The first quarter of the year is usually quiet for new listings, however there was one new security quoted on the NZDX Market this quarter. NZDX New Debt Securities Quoted Issuer Infratil Ltd

32

31 March 05 Data

Q1 05 (%)

Security code

Date listed

Security type

Interest rate

Maturity date

IFT090

1/03/05

Infrastructure Bonds

8.50%

Feb 2020

The raising of interest rates in the past year has weakened the market value of existing bonds, resulting in low 12 month returns for the NZ Government Stock and Corporate Bond Indices. A significant event for NZX NZ Government Stock Index this quarter was the maturity of the February 2005 Government Bond, which lengthened the modified duration of the Index by about 0.6 years.

Q1-05 UPDATE Corporate Accreditation of NZX Market Participants Corporate accreditation is one of the pillars of the regulatory supervision conducted by NZX in respect of its Market Participants (commonly known as Broking Firms). The road to successfully attaining corporate accreditation commences with submitting an application form and providing a number of prescribed documents which contain details of the Firm’s business, key staff, procedures, systems and controls. The application process also requires the principals (i.e. the directors, partners or the sole trader him/herself) of the Firm to make certain undertakings to NZX to the effect that they are fit and proper to hold that position and they will ensure that the Firm will comply with its regulatory obligations. Any new Firm seeking to become a Market Participant will need to undergo this application process. Under the NZX Participant Rules, which came into effect on 3 May 2004, all existing Firms had to apply to attain the newly created designation of Market Participant. This application had to be made by 3 November 2004, the end of the transitional period for the new Rules. NZX has now completed processing all of the applications received from existing Firms and made determinations in respect of all of the applicants. A list of Firms accredited as Market Participants (and NZX Sponsors) is provided on the NZX website in the ‘Market Participants’ section. Given its fundamental importance, the application process for all existing Firms was a meticulous one involving a considerable amount of work for both NZX and the applicants. We acknowledge the hard work performed by the applicants prior to the submission of their application. We wish to thank all applicants for this.

We believe that the outcome has been extremely beneficial in that NZX now has detailed information relating to, as well as a greater understanding of, the composition and activities of its Participants. Furthermore, Participants are likely to have a much greater understanding of their regulatory responsibilities having undergone the process. During the process, each Market Participant had to demonstrate that they had: • Professional indemnity insurance • Written compliance procedures • A designated, independent compliance resource to provide compliance oversight • Written business arrangements.

continuity

and

emergency

NZX freely admits that it has deliberately raised the bar of what it takes to become and remain a “member” of NZX (as was the terminology used prior to the demutualisation). We believe that this has greatly enhanced the section of the financial services industry for which NZX, in exercise of its function as a “Self-regulating Organisation” is responsible. NZX wishes to congratulate all Firms that have successfully attained the designation of NZX Market Participant. Accreditation for existing Firms was by no means a formality. In this regard, we note that not all applications were successful. We firmly believe that using the NZX brand, as Market Participants are entitled and encouraged to do (whether in signage or stationery), will provide a mark of quality and is an achievement to be proud of.

33

NZX Submissions

Link Market Services Towards the end of last quarter NZX and ASX Perpetual Registrars Limited (ASX Perpetual) announced that they had formed a joint venture to offer full registry and employee share plan administration services to the New Zealand market. Link Market Services Limited (headquartered in Auckland) was created as the company to deliver these services. NZX and ASX Perpetual each have a 50% stake in Link which has also acquired BK Registries Limited New Zealand’s second largest registry business. Link seeks to deliver a premium level of service to New Zealand issuers (and a seamless service to dual-listed entities) based on ASX Perpetual’s leading edge share registry system.

Introducing i-Search This quarter NZX launched i-Search, a new online database tool which provides to access NZX market announcements. i-Search information is searchable on multiple levels and includes the original company documents. This provides an invaluable tool for building and maintaining a picture of what is happening with NZX Listed Issuers. i-Search is updated in real time and also contains historic market announcements which include directors’ and officers’ disclosures and substantial shareholder details, as well as the full financial disclosures required by the NZX Listing Rules. If you are interested in finding out more about i-Search please see our website (www.i-search.nzx.com). Free trial subscriptions are also available, email [email protected] to find out more.

34

NZX takes a proactive role in commenting on, and informing people of, issues which affect New Zealand’s economy. OPEN is one communication tool which we use for this purpose and in addition, NZX prepares submission documents on specific issues. This quarter, NZX produced a submission on the Unlisted Securites Market to the Minister of Commerce. Previous submissions have been on the Stobo Report and the Report of the Savings Product Working Group. These submissions are available on the NZX website in the ‘About NZX’ section under ‘Presentations and Consultation Documents’.

Advertising with NZX NZX is now offering online advertising through the NZX website. Advertising on our website offers you a prominent position on one of the top ten financial services websites in New Zealand (source: Neilsen Netratings, Nov 2004). The advertising options include banner and island placements on selected pages of the NZX website. In addition, print advertising is an option in OPEN. Advertising in OPEN puts your message in front of approximately 4000 (as at November 2004) key individuals including CEOs, NZX Market Participants, lawyers, investment bankers and other interested parties. For more information about advertising and rates please visit the NZX website’s ‘Contact Us section’.

The source for market information

i-Search is a new online database service from NZX which provides access to all market announcements.

i-Search provides searchable information and includes the original company documents.

www.i-Search.nzx.com

Special offer Try i-Search free for one month. To trial i-Search or for more information please call the Market Data team on +64 4 436 2879 or email [email protected].

35 To advertise here, contact [email protected]

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