Lookout the sharemarket is shrinking

The obsession of Australian investors with yield and capital returns may come back to haunt the Australian Stock Exchange if company boards continue to pander to short-term-focused fund managers and not build their companies for the future benefit of shareholders.

That seemed to be the message from Tony Osmond, Citi’s head of corporate and investment banking in Australia and New Zealand. Mr Osmond said the Australian bourse was now a “capital return” exchange, not a “capital raising” exchange and it presented real danger for the future of the sharemarket and the country.

`He told a conference in Sydney recently that capitalisation of the ‘all ords index’ had fallen to 0.9 per cent of gross domestic product from 1.2 per cent 10 years ago. By comparison, the combined New York Stock Exchange and Nasdaq was now 1.9 times GDP, compared to about 1.6 times a decade ago.

As reported in the Australian Financial Review Mr Osmond said: “In the US there has been a rapid expansion – a lot of that is driven by increased risk taking, and a risk-taking culture. Also the boom in technology stocks,” he told the meeting of chief financial officer organisation the Group of 100.

Australian shareholders focused on getting their money back, rather than reinvesting it, he said. That had thwarted a recovery in outbound mergers and acquisitions since the global downturn. Boards now remained too risk averse.

“There are 148 fund managers in Australia. They are all competing for super funds and they are assessed on their quarterly performance and will be hard for corporate Australia to push against it.”

His reported analysis shows shareholders have taken more out of the exchange than they have invested in it. Capital returns and delistings combined amounted to about $790 billion over 10 years, while investment in the form of equity raisings and new IPO investments amounted to almost $200 billion.

A spokesman for ASX Ltd pointed to the obvious jump in IPOs in the past couple of years, including numerous technology company listings, where they were very rare in the past.

There were 107 IPOs in 2014-15, an 82 per cent rise on the previous year. The amount of new capital raised was $127.7 billion, up more than 179 per cent. Secondary raisings were at $38 billion, up 5.2 per cent.

Mr Osmond said the ASX was looking increasingly like the Toronto Stock Exchange, with a heavy leaning toward resource and finance stocks. “If you’re an investor, you are going to put your money where it is most liquid and that is the real danger for Australia.”

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