Here’s why the RBA is worried about the ASX. Should you be too?

Nick Sundich Nick Sundich, April 24, 2024

The RBA is worried about the ASX. It all but confirmed that in its latest bulletin, released last week. The bank regularly provides its insights into the Australian economy and financial system in this publication. Much of the focus was on the impact of its tightening in monetary policy (in other words, the rapid increase in interest rates). But there was one particular paragraph where it expressed concern about the ASX’s decline. This view is hardly earth shattering, but the fact that Australia’s central bank is making its view known here certainly raises eyebrows.

 

The RBA is worried about the ASX

One article in the bulletin was about the growth in Australian private equity (PE) and the implications on Australian businesses and ‘public capital markets’ (Read: The ASX). The ASX is a much larger market than private equity when you judge it by how much capital is raised and the capitalisation of companies – the ASX’s $2.7tn easily outdoes PE’s $66bn – of which $44bn is already invested and $22bn is cash waiting to be deployed. But of course, the ASX is home to some of Australia’s largest businesses.

At the same time, the report noted that private equity has nearly tripled in size since 2010, even with a decline in 2023 due to higher debt servicing costs. Despite the decline, there were a number of companies to have been taken over, such as Invocare, Healthia and Pacific Smiles. The bank warned,’ Heightened levels of private equity buyout activity may reduce the diversification of the public equity market’. Yes, Blind Freddy could tell you that, but this is not Blind Freddy, it is the RBA.

 

Is public better than private?

The report did give credit where it was due to private equity, noting it efficiently allocates capital to companies with innovative products or services, but facing uncertain growth prospects and earnings potential. It said also that underperforming public companies may be targeted by private equity investment, and this could bring new expertise and experience to maximise growth. On the flip side, it noted that the public equity market was more efficient at allocating capital, given the reporting and governance requirements that apply to public companies.

‘Removing companies from public listing lowers transparency and may make it more difficult for investors to compare company and management performance to make informed investment decisions,’ the bank said.

‘Private buyouts of large companies have removed equity capital from the Australian public equity market at a time when there were limited inflows of new listings and initial public offerings’. It noted that there a greater concentration of biggest companies in the public equity market, to levels not seen in a decade. In other words, the biggest companies (specifically the top 20 judged by market capitalisation) make up a higher percentage.

 

Will this trend continue?

In terms of the biggest companies becoming bigger, that is likely to happen. Just look at the companies in the ‘Top 20’: BHP and Rio, All Four of the Big Banks along with Macquarie, the Big 2 supermarkets and Wesfarmers, Telstra and Transurban.

But this report was touching on a bigger elephant in the room, the lack of capital raisings and new listings. There has been a dearth of non-resources listings in the past two years. And the few to list were not successful, Redox being one point.

In our view, it may take just one or two successful IPOs for the market to open again. All that’s needed is for one company to be brave enough to dip its toes in the water, to risk being a poor investment, for the potential payoff of being a successful investment. And the benefits would extend to the entire public market.

 

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