It is interesting to think about the future growth of KiwiSaver and the likely effect it will have on financial markets. When you consider the growth trajectory of KiwiSaver, you can see a great amount of new money coming to be invested – and the New Zealand sharemarket is likely to get a good dollop of it.
This new money from KiwiSaver funds will support the New Zealand sharemarket in the future. In market dips, KiwiSaver funds will be ready to buy allowing those who want out to sell.
This is a kind of put option for existing shareholders. It means those who own shares know that they can be fairly sure they will be able to sell their shares to KiwiSaver funds with their ever-growing hordes of cash. In the jargon, they have the option to “put” their shares when they need to get out.
This “KiwiSaver put” should remove some of the downside volatility that we might normally expect and give confidence to those in the sharemarket. After all, there will continue to be a steady stream of money from KiwiSaver funds that will want to buy shares. Sure, there will still be volatility – but less volatility than we might have had.
Consider the numbers: at the moment, there is a little over $40 billion in KiwiSaver. According to research house Morningstar, of that $40 billion, 9 per cent is invested in New Zealand shares.
That means that currently, there’s around $3,600,000,000 of KiwiSaver money invested in New Zealand shares.
And there is more money coming: lots more. The New Zealand Treasury estimates that in just three years there could be $70 billion in KiwiSaver. At that point, assuming that KiwiSaver funds continue to invest 9 per cent in New Zealand shares, there will be $6,300,000,000 in the New Zealand sharemarket from KiwiSaver alone.
If these assumptions are correct, over the next three years, there will be an additional $2,700,000,000 to be invested in New Zealand shares.
These additional funds that will come into the market will have an impact on share prices.
At the moment, there are very few new companies coming onto the sharemarket and occasionally companies leaving (e.g. Nuplex, Hellaby). This means that this new surge of money from KiwiSaver has only the existing companies to invest in (maybe a few more if we do get some listings, but perhaps a few less).
Therefore, there is a huge weight of money coming down the track which will chase a fairly limited number of shares.
This KiwiSaver money is probably already holding the New Zealand sharemarket at reasonably high levels and it may continue to underpin values for the future.
The new money from KiwiSaver will not simply stop in 2020 – it will grow for years. I would not bet the house on the “KiwiSaver put” but the numbers suggest the New Zealand sharemarket ought to stay strong in the coming years.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.