“The ASX is shrinking for the first time in 18 years” – say the headlines in much of the media. Fake news? No, it isn’t.
Yes, the ASX is shrinking
This is so because the number of companies is falling (as companies are taken over and non-listed companies avoid listing on the ASX) and the market capitalisations of remaining companies are not growing enough to compensate.
This is the first time this has happened since 2005. However, the only reason it occurred that year was when News Corp moved to the US. This time, it is caused by several factors as noted above and again below. Another thing that is different next time is that there is no certainty things will improve in the new year.
Why the ASX is contracting
Look at the ASX 200 and you’ll see a 2% decline since February 2022. Yes, it could be better, but it is far from doom and gloom, isn’t it? However, other indices tell a more negative story. The All Ords is down 8% since August 2021 and the ASX Small Ords is down 25%. For comparison’s sake, the S&P 500 is virtually flat since then, although there has been significant volatility over that time frame.
As we noted above, the number of companies is shrinking as companies get taken over and delist as a consequence. The list of companies has included big names such as Oz Minerals and InvoCare but also smaller names too. For companies such as these, the promise of a quick cash return is more compelling than waiting on the bourse for another few years to re-rate.
A big IPO drought
The exit of other companies would be no big deal if there were a flurry of new companies coming to list on the ASX and take their place. However, we are talking hypotheticals here, because there is a clear drought of IPOs. There have been very few IPOs that are not resources small caps since early 2022 – Redox is virtually the only new listing with a market cap above A$100m, and its listing was average at best. Companies like Virgin Australia and Chemist Warehouse have wanted to list for months but are holding off until conditions improve.
And, even though we have no data to measure this, there are likely plenty of companies that haven’t put themselves forward as candidates, that are now cold about the idea of listing. This is due to the more onerous requirements around ESG obligations, shareholder activism and the scrutiny from regulators and financial reporting requirements.
Will things improve in 2024?
In our view, it is reasonably possible. But, we cannot say anymore than that because there are so many factors that will answer this question. In particular, we will need a new Bull Market in the small cap space, particularly for technology and healthcare stocks. A resurgance in property stocks will help too – in fact, it might even be enough to catapult the ASX in absence of a new bull market for tech and healthcare stocks, given so many property stocks are still well below pre-COVID levels. If interest rates have peaked and start to decline in 2024, it is not unreasonable to see this happening to these sectors. And finally, some of the companies that have outed themselves as candidates like Virgin Australia and Chemist Warehouse following through on their ambitions will help too.
All we have said doesn’t mean some individual stocks won’t do well, don’t get us wrong. But, so far as reversing the trend of a shrinking ASX is concerned, it’ll take more than just a couple of stocks doing well to reverse the trend.
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