Don't cry for me Argentina: Crocodile Tears at NZX departures
On the chronic failures of our capital markets
I’m getting tired of all the “don’t cry for me Argentina people” at the NZX about right now — if you go on LinkedIn you will find dozens (dozens!) of people crying about the state of the NZX; the potential loss of Arvida and The Warehouse, and how Private Equity is bad. It strikes me as a lot of crocodile tears. You can’t have your passive S&P 500 funds and your NZ funds that largely invest in the NZX top ten or and have small and mid-caps. You can’t have your cake and eat it too! It doesn’t work (I wonder how many of the people crying about these “losses” on the exchange actually are invested in these equities? Are they invested at all?).
The problem is, obviously, liquidity. NZ small and mid caps are liquidity starved. The reason why they are starved for liquidity is that most liquidity (including, likely, yours) goes towards passive index funds or index-like funds, which push money towards larger caps and omit small and mid caps. The result is liquidity starvation — there’s no cash left for the rest — there’s no cash going into the Arvida’s of the market, because it’s allocated elsewhere. It’s also a Catch-22 — the small and mid-caps remain small, so any meaningful investment would make a KiwiSaver fund a significant investor in the company (it also would expose KiwiSaver funds to a liquidity risk — they can’t offload a significant stake in a small company easily without needing to match the transaction off-market).
Naturally the result is a lot of companies listed on the NZX that are all chronically undervalued due to said lack of liquidity — take a dart and throw it at any small or mid-cap and you will likely find it’s undervalued. So the question is — if you are (i) either a listed company; or, (ii) someone with a large pool of capital (i.e private equity) — why the hell should a company remain listed on the NZX?
Suspend your patriotism for a bit — if a company is listed on NZX and the value is never reflected because of how we have set up our capital markets, then can you blame a company for leaving or being taken over?
Clearly, there is a failure in public markets here. The responsibility sits squarely on the shoulders of allocators — fund managers, KiwiSaver managers, passive indexes. It also sits on the shoulders of those who invest and those who advise — if you are constantly being told to invest passively (by Girls That Invest or any other number of “gurus”) then you are probably going to invest your money in that direction. We have created our own fate.
The solution is more engaged capital, more engaged investors and more liquidity toward small caps and mid-caps. I have to say though — whenever I talk about this, people are enthusiastic as anything but few actually walk the talk. Perhaps that’s another symptom of our typically New Zealand “yeah nah” attitude.
I fear if we continue in this way we will have barely a market at all. Public markets thrive on engagement, volume and liquidity. It's hard to say the NZX has managed to do much of this — their podcast series is about as interesting as watching paint dry, or cutting the grass at Hobbitton with kitchen scissors.
There is another point here — the NZX is cut-off from the rest of the world — you cannot access NZ equities on IBKR, or Robinhood, or most other platforms internationally. This starves us for liquidity further. Our best hope, as some shrug, is some cashed up Aussie fund managers. It is grim.
I don’t have any tears for the departure of Arvida or the potential departure of The Warehouse. I am going to hit you with some Marxism now. The loss of these companies is creative destruction, via Schumpter:
Capitalism ... is by nature a form or method of economic change and not only never is but never can be stationary. ... The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organisation that capitalist enterprise creates.
... The opening up of new markets, foreign or domestic, and the organisational development from the craft shop and factory to such concerns as U.S. Steel illustrate the process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.
[... Capitalism requires] the perennial gale of Creative Destruction
Let the gales blow! We will never have a good exchange without creative destruction, and we will never have a good exchange without new, innovative companies listed. I find the whole “let’s list KiwiSaver” thing a bit dull too — if that is what our best and brightest have to offer, then I fear for the rest of us! Listing a bank? I am almost asleep already.
We need more Mainfreight’s and Xero’s. That’s what drives and exchange. Look to the US — you will not find power companies and telecom company in the S&P top 10. We need more entrepreneurialism and celebration of business success!
Coneheads
I work in the CBD and live around the CBD. I am constantly surrounded by cones. I hate them. Every day there seems to be a new crop of cones — perhaps they breed like rabbits? Or grow like a particularly orange fungus? They are ugly and I often wonder what visitors must think — “Oh, welcome to Auckland, home of the cone!” Or perhaps — “sure, we have some ugly buildings, but CHECK OUT these cones!”
So I did enjoy Wayne Brown’s video about cones. Link here, well worth watching. Also worth reading the EY report here. Road cones are nobody’s friend — the sooner we are rid of their orange excess the better.
Gucci Gucci Louis Louis Fendi Fendi Pradaaaaa
Gucci owner Kering saw sales slow — no surprises there — they had already guided for it. Gucci saw sales down 20% — again, no surprises, but I think this should be ringing alarm bells about Sabato, the designer — he’s quiet luxury; it’s too late to be quiet luxury!
One bright spot was Bottega - sales ticked up +3% — while YSL sales saw a mild drop of -8%. Look — none of this is great, but this is a company in turnaround (and you are getting the company at a discount as a result). Evidentially Pinault’s wife, Salma Hayek, is in the driver’s seat — she’s an operator. The family office purchase of entertainment agency CAA was deft — fashion/celebrity synergies are obvious — but Gucci is the problem child here: I just think Sabato needs to go — replace him with a “star” talent, who can drive the house in a new direction. Quiet luxury is so 2023.