Is the Aussie share market about to shrink?
01 July 2014
The Australian share market may be about to shrink, according to Credit Suisse. It is a phenomenon known as "de-equitisation", whereby public companies withdraw the number of shares on the exchange, typically by buying them back. It has the effect of raising share prices over time, at least in theory. If the asset is more scarce, it should become higher priced.
The phenomenon has become common overseas, but not in Australia. In part it is a response to low interest rates. If the cost of debt is low (interest rates), then the cost of equity (share capital) becomes, by comparison, more expensive. The logical response is to withdraw the reliance on equity capital and increase the reliance on debt capital.
A Credit Suisse report says:
"De-equitisation occurs when equity retiral is greater than issuance. It has been an important theme in the US and European equity markets for most of the past ten years. Since 2006, the share count in the US has been flat. In contrast, Australian companies have a history of being among the biggest equitisers in the Developed World. Since 2006, the equity base of the ASX 200 has grown by an average of 3.9% p.a.
¦ De-equitisation comes to Australia: Investors have absorbed an average of $47bn net new Aussie equity per year since 2006. They were buyers of $24bn last year. They will not have to buy any this year—we forecast the Australian equity market will de-equitise. M&A has picked up, debt is the preferred form of finance and 21st Century Fox has de-listed. Limited, if any, net equity supply and continued solid demand promise to be positive for index levels. We raise our December 2014 ASX 200 target to 6,000 from 5,600.
¦ Low cost of debt: The combination of the lowest cost of debt in a generation and recovering cash flows should encourage further equity retiral in the form of M&A and buybacks. Companies that may benefit from the low cost of debt include M&A targets such as Myer and Beach Energy; value enhancing acquirers such as carsales.com.au and TPG Telecom; and EPS accretive buy-backers such as CSL."
Here is the trend. At the very least it suggests that the number of shares will not gain pace:
Here is an international comparison:
What does this mean for SMSFs? The Australian share market has become a bit of a two tier market because of SMSFs. SMSFs concentrate heavily on banks and other large dividend paying stocks, so in many respects the share market has become like a proxy bond market, paying tax advantaged returns (through dividend franking).
In theory, de-equitisation should mean that shares rise in price. But it is likely to affect the non-divdend paying stocks more than the dividend paying stocks, especially in mining and energy. They are having difficulty attracting interest, as Gary Stone points out. It may mean that some company's shares become more scarce, but that does not necessarily mean that they become more attractive as investment opportunities.
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