Just over a week ago, ASX Limited, the owner of Australia’s main stock exchange, boasted of its growing clout as a global venue for tech stock listings.
Tech, up until recently, was all but absent from the market. Now it is the third biggest source of companies on the exchange, an earnings slide deck showed.
Over the past four years, the total market value of tech companies on the bourse had nearly trebled to $63 billion – 3.3 per cent of the entire market, it said.
One week on, tech on the ASX has certainly been in the headlines but for less flattering reasons.
Consider the following:
- Get Swift, a last mile logistics software company co-founded by a former AFL star, has been hit with a $300 million class action lawsuit amid claims it misled investors through a series of over-hyped announcements. Shares in the company have plummeted 83 per cent;
- Big Un, an online video production company, and the best performing stock on the ASX last year, has requested a voluntary suspension of its shares after being unable to respond to queries from the exchange about its business; and
- Shares in Buddy Platform, an internet of things data cloud (how many buzzwords do you need in a description?) company with tenuous links to Lady Gaga, tumbled when the company emerged from a three week voluntary suspension of trading, after also being unable to respond to ASX queries.
Oh, and just good for measure, there were also reports that social media was being used to pump up the value of small cap stocks on the ASX – and that the corporate regulator was investigating whether the exchange was being used by criminals to launder money.
Maybe these are isolated incidents. Maybe they aren’t. But, with markets still near record highs, and tech companies now the world’s most valuable, you didn’t have to be Nostradamus to see something like this coming.
“We are late in a bull market,” says John Hempton, an outspoken investor and shortseller, who runs hedge fund Bronte Capital. “There is lots of crap all over the world. It should be no surprise there is a lot in Australia. And late in a bull market there are people – overconfident retail investors – punting stocks who shouldn’t be.”
Of course, if companies have been acting illegally (and we are not suggesting that) they should be held accountable by the corporate regulator for that.
But seasoned market observers say the army of retail day traders punting on extremely risky and speculative small-cap stocks were always playing with fire, and it was only a matter of time before they got burnt.
Forager Funds chief investment officer Steve Johnson (who raised concerns about valuations at the smaller end of the ASX in January) says many investors, enticed by Atlassian’s blockbuster float in the US or Aconex’s buyout by Oracle, were seduced by the prospects of huge returns, and placed too much faith in unproven tech companies.
“There is a well trodden path of people capitalising on the demand [for huge returns] out there,” he says. “I don’t know whether it’s new suckers every time, or the same people learning the same lessons over and over again. But the speculative fervour of ‘someone else is getting rich’ is out there. And as soon as you get that dynamic, it’s very difficult to stop”.
The rise of self-managed super funds that allow people to punt their retirement savings on individual stocks, a ‘strike it rich’ mentality towards equities (the very nature of the mining business) and perhaps even our fondness for gambling could all be contributing to Australia’s unique day trading culture. Call it the Hot Copper effect.
Hempton also pinpoints Australia’s notoriously strict libel laws, which make it harder for the media, and for vocal investors, to expose nefarious activity, as a factor.
“The current environment and strong defamation laws, mean the Australian market is ripe for this kind of thing” he says.
A couple of years back, the ASX adopted a deliberate strategy of trying to entice tech companies, mostly smaller and untested, and sometimes from offshore, to list on the exchange.
It was designed to diversify the exchange away from resources (and offset a decline in new listings from that sector).
And it seems to be working out well, at least for the the exchange’s own shareholders – ASX Limited’s stock is near pre-financial crisis highs. And, the average performance of all tech companies on the exchange over the past year is 22 per cent, compared to 2.6 per cent for the ASX 200.
Still, the move contributed to an influx of speculative tech (and medicinal marijuana companies and lithium explorers) onto the ASX in recent years. Many (including Big Un and Buddy) used the ‘backdoor listing’ technique – something we have criticised in the past, that has now been curtailed.
Bubbles are as old as markets themselves. From Australia’s Poseidon bubble of the 1960s, to the South Sea bubble in London in the 1720s, and Tulip mania a century before that.
Regardless, the very existence of small, extremely early stage tech companies with tiny revenues on a publicly listed stockmarket should be a red flag.
Venture capital funding for tech companies – allowing them to stay private for longer as they attempt to establish a viable business – has never been more plentiful.
A decision by a tech start-up to list suggests capital couldn’t be obtained anywhere else. Indeed, some of the world’s best known US start-ups have been putting off listing for as long as possible.
In other words – there were plenty of reasons to be sceptical about the small cap tech boom on the ASX. It’s just that some investors (and not just retail investors, a few prominent institutions have been burned in the recent meltdown too) chose to ignore them.
It’s a truism in Australian business journalism that retail investors need to be treated fairly.
But when some are determined to suspend all rationality in search of fast returns, there are limits to what can be done to protect them.
“The whole ‘regulator needs to do more’ argument it doesn’t work for me,” says Forager’s Johnson. “When people want to lose money, people will find a way to fleece them.”
This article was originally published by the Sydney Morning Herald’s Business Day. Read the original here, or follow Business Day on Facebook.