Will KiwiSaver distort stock prices?

KiwiSaver Q&A: Is KiwiSaver creating market distortions by pumping money into the New Zealand stock market at a bearish time?

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KiwiSaver Q&A: Is KiwiSaver creating market distortions by pumping money into the New Zealand stock market at a bearish time?

22nd Aug 11, 5:11pm by Amanda Morrall

<p> What effect is KiwiSaver having?</p>

By Amanda Morrall

According to research house Morningstar New Zealand, only 12.35% of the total pool of NZ$8.52 billion currently in KiwiSaver is invested in New Zealand equities.

On that basis, the short answer to your question is no?

Although there are close to 1.8 million KiwiSavers enrolled and the funds keeping flowing, relative to the stock market, it is not enough to impact on stock prices in a substantial way.

As Morningstar researcher Chris Douglas explains further, that 12.35% equates to just over NZ$1 billion, "a very small amount even for the relative illiquid New Zealand stock market.''

The New Zealand sharemarket is capitalised at NZ$55 billion and average daily turnover is around NZ$125 million. Based on average daily trading volumes, Morningstar doesn't expect KiwiSaver to be boosting stock prices any time soon.

Douglas said it was important to remember that KiwiSaver was a regular savings investment, a structure which restrained stock inflation to some extent.

"While liquidity is tight in the New Zealand equities market, the important point to remember with KiwiSaver is that money is incrementally being added into the market over time rather than huge pools of money coming in and swamping the market."

In the context of global equities, KiwiSaver is but a "tiny drop in the ocean,'' he added.

Carmel Fisher, managing director of Fisher Funds, concurs. She has fielded similar questions in the past about the potential impact of large funds flow from the NZ Super Fund, KiwiSaver and other managed funds driving up the market due to the purchasing of favoured stocks.

Fisher also maintains KiwiSaver volumes simply are not big enough to make any significant difference.

"The reality is that the New Zealand share market has sufficient scale and depth such that no one investor, even investors such as the Super Fund (with NZ$19.2 billion under management) and a combination of all KiwiSaver funds (assuming they all acted in unison), is large enough to drive the market direction for any length of time.

"That is not to say that large investors can’t have a significant impact on the price movements of individual stocks on any given day – this does indeed happen – but to buoy the market over extended periods would require significant flows of capital.''

By Fisher's estimation, about NZ$2 billion of the NZ$8.5 billion pool of KiwiSaver money is invested in growth funds.(For more on types of funds, see our KiwiSaver funds section here).

Given the typical growth fund allocation of 10-25% to New Zealand equities, Fisher approximated that NZ$200-500 million had been invested in the sharemarket over the past four years, "the rough equivalent of a few days of market turnover."

She estimated another NZ$70 million or so was invested into New Zealand equities via balanced KiwiSaver funds, which has a slightly lower allocation of shares.

Brian Gaynor with Milford Asset Management also said it was difficult to see how KiwiSaver money could inflate the NZX particularly if money from other sources was moving out of it.

"There may also be other money coming out of the sharemarket at the same time so the NZ sharemarket could be suffering a net loss of funds at present. We don’t know.''

The table below, provided by Morningstar, shows the estimated funds flowing into all KiwiSaver funds for the first six months of 2011. (It is based on figures provided to Morningstar by most but not all KiwiSaver providers). The portion invested in New Zealand equities is approximately NZ$152 million for the six month ending June 30.

Jan 2011 NZ$m	Feb 2011 NZ$m	Mar 2011 NZ$m	Apr 2011 NZ$m	May 2011 NZ$m	Jun 2011 NZ$m	NZ Equities 6 months to June 2011 NZ$M
375.3	349.5	346.3	332.3	291.4	307.2	152.3

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2 Comments

by Boatman | 22nd Aug 11, 9:35pm 1314005727

Its very unlikely that any stock market will be "inflated" by a compulsory ( such as Australia) or voluntary Superannuation ( such as South Africa) . Quite simply , the amounts invested have too many options and combinations and variations to ever let this happen .

My Kiwisaver is in Australian Mining stocks ( My service provide is Craigs Stockbrokers ) . My wifes family have theirs in Cash with Westypac and my cousin is in Government stocks becasue he retires in 2020 so does not want risk .

You dont have to put one cent on the NZX , and with the casino mentality there , I would stay well away from the NZX anyway .

by David George | 23rd Aug 11, 11:41am 1314056489

Some recent work from the San fransisco Fed suggests that the retiring Boomer bulge will tend to depress stock market values.

From Bloomberg:

"Aging baby boomers may hold down U.S. stock values for the next two decades as they sell their investments to finance retirement, according to researchers from the Federal Reserve Bank of San Francisco.

Americans born between 1946 and 1964 are beginning to retire as the U.S. stock market is still recovering from the financial crisis that began in 2007 with the collapse of the subprime-mortgage market. The timing is “disconcerting” and, since stock prices have been closely tied to demographic trends in the past half century, “portends poorly for equity values,” adviser Zheng Liu and researcher Mark Spiegel wrote in a paper released by the bank today.

The equity-price-to-earnings ratio of U.S. stocks tripled from 1981 to 2000 as baby boomers reached their peak working ages, and has declined since then, according to Spiegel and Liu. Overseas investors’ demand for U.S. stocks might help mitigate the effect of a baby-boomers’ sell-off, yet the impact would probably be limited, they said.

“For many primary purchasers of U.S. equities outside the U.S., their demographics are even worse than ours, in particular Europe and Japan, which have older age profiles prevailing than the U.S. does,”

While we Kiwis don't have the same sharemarket exposure I suspect that other asett classes may be affected by the same trend. A small drop in buyers and increasing numbers of sellers can have a dramatic effect on values - same as the reverse that applied when the boomers began building their investments.

A very good take on this from Chris Martenson:

http://www.youtube.com/watch?v=fUJU1aLEQQA&feature=player_embedded