Australia Stock Market Set to Shrink on Foreign Takeovers

Australia’s stock market is shrinking for the first time in eight years. For Credit Suisse Group AG, that’s a signal to buy.

Buybacks, acquisitions and delistings will outweigh equity issuance by as much as A$2 billion ($1.9 billion) this year, the first time that has happened since 2006, according to data compiled by Credit Suisse. The purchases of David Jones Ltd. and Goodman Fielder Ltd. and other mergers will drain about A$22 billion from the market in 2014, the data show.

The shrinking A$1.5 trillion stock market is struggling to accommodate Australia’s A$1.6 trillion in pension savings, which are forecast to almost double by the end of this decade. Hasan Tevfik at Credit Suisse says the falling share count will boost the benchmark S&P/ASX 200 Index to 6,000 points by year end as demand outweighs supply. That’s about 8.2 percent higher than yesterday’s close.

“There is too much money chasing too little stock,” said Tevfik, a Sydney-based strategist at the Swiss bank. “International companies want to buy our stocks. The combination of less equity issuance and solid demand, underpinned by superannuation in-flows, will be positive for equities.”

Australian employers contribute 9.5 percent of workers’ wages to a compulsory national pension system, known as superannuation, that has traditionally favored investments in domestic equities over foreign-listed stocks or bonds. Deloitte last year estimated the country would have A$3 trillion in pension-fund assets by 2020.

Share Valuations

The S&P/ASX 200, which closed today at the highest level since June 2008, remains about 18 percent below its November 2007 record. The gauge added 0.6 percent to 5,576.70 at the close in Sydney. The Australian measure trades at 15.4 times estimated earnings, compared with 16.6 on the Standard & Poor’s 500 Index.

Australian shares represent 2.3 percent of world-market capitalization, according to data compiled by Bloomberg.

In 2013, local companies raised A$24 billion more than they handed back to investors, with outstanding equity growing at 3.9 percent annually since 2006, the Credit Suisse data show.

As Australia’s stock market reached a record high in 2007, net equity issuance topped A$90 billion as companies went public before the global financial crisis. IPOs and share sales slowed during 2008 as credit markets froze, triggering a slump in global economic growth. In 2009, more than half of all companies listed on the nation’s major exchange, operated by ASX Ltd., raised extra equity capital, ASX data show. Issuance has since held at less than A$40 billion a year, Credit Suisse data show.

Retail Takeover

Woolworths Holdings Ltd., a South African supermarket chain, made a A$2.15 billion takeover of David Jones that removed the retailer from Australia’s benchmark S&P/ASX 200 Index on July 18. Greencross Ltd., an operator of veterinary clinics with a market capitalization about half that of David Jones, was its replacement.

The Woolworths deal is being funded by cash and debt, the company said in May.

Goodman Fielder, the Sydney-based maker of Meadow Fresh yogurt and Wonder White bread, is being bought by Singapore-based Wilmar International Ltd. and Hong Kong’s First Pacific Co. They lowered their bid this month after Goodman said it plans to write down the value of its assets amid intense competition.

Cheap Debt

“The thing that’s changed is that the M&A that is happening this year is not being financed by local equity investors,” said Tevfik. “It’s international acquirers using cheap debt. The combination of the lowest cost of debt in a generation and recovering cash flows is the major reason why we think Australia will de-equitise this year.”

Billionaire Rupert Murdoch’s 21st Century Fox Inc. was replaced on the local index by Sundance Energy Australia Ltd. in May. Sundance was yesterday valued at A$705 million, Bloomberg data show.

The country’s benchmark equities gauge is becoming more concentrated with companies in similar industries. Financial and materials firms now make up more than 60 percent of the S&P/ASX 200 Index, up from 51 percent in 2004. The nation’s sharemarket is the world’s 11th largest, according to data compiled by Bloomberg.

“The big issue for investors is the concentration of the ASX,” said Chris Hall, senior investment officer at Argo Investments Ltd. in Adelaide.

U.S., Europe

The availability of stocks to buy has declined for five of the past eight years in the U.S. and for two years over the period in Europe, the Credit Suisse data show.

Australian companies from Amcor Ltd. to Brambles Ltd. and CSL Ltd. were initially penalized by investors for making large offshore acquisitions, said Tony Osmond, Sydney-based head of investment banking in Australia for Citigroup.

Amcor lost 17 percent of its market value in the two weeks after Feb. 13, 2009, when it confirmed it was in talks to buy part of Rio Tinto Group’s Alcan packaging assets in Europe, according to Bloomberg data. It eventually agreed in August of that year to buy the global pharmaceuticals and tobacco-packaging units as well as Alcan’s Asian and European food businesses for $2.03 billion. The shares have more than doubled since.

Australian firms buying offshore companies or assets over the past five years comprised just 18 percent of total transactions involving the nation’s companies, Bloomberg data show.

Spotless IPO

Even the country’s largest initial public offering since 2010 might not be enough to tip the balance this year. Cleaning and catering firm Spotless Group Ltd. raised about A$995 million and listed in May, the biggest IPO since rail operator Aurizon Holdings Ltd.’s A$4.3 billion offering in 2010, data compiled by Bloomberg show.

Spotless’s raising will be exceeded when private hospital and diagnostics group Healthscope Ltd. and its owners raise as much A$2.57 billion in a share sale later this month. Before Healthscope’s offering, Australian IPOs raised about A$5 billion this year, more than three times the A$1.3 billion raised for the same period in 2013, the data show.

Medibank Private Ltd., the country’s largest health insurer, is scheduled to list by the middle of next year. Nomura Holdings Inc.’s Sydney-based analyst Toby Langley values the insurer at about A$4 billion based on peer-group analysis, he said in March.

“There has been a drain of capital out of the Australian market in the last three to four years and if we don’t rectify that, the ASX will become globally irrelevant,” said Citigroup’s Osmond. “The best way to do that is for Australian investors to back our companies to expand overseas.”

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