Super funds now own almost half of the Australian stock market

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Research from Credit Suisse shows how connected the domestic stock market is to Australia’s $2.5 trillion superannuation pool.

The report says Aussie super funds now own almost half of the shares on issue in the Australian equity market, up from less than 40% in 2013.

Self-managed super funds (SMSFs) have around 20% of the market, with the remainder owned by institutional funds.

The total market cap of the ASX200 is estimated at around $1.737 trillion at March 1, according to asx200list.com.

So as a rough guide, the Credit Suisse figures indicate domestic super funds own more than $700 billion worth of Aussie stocks.

That total doesn’t quite match with figures released this time last year by the Association of Superannuation Funds of Australia, which showed institutional funds had around $350 billion allocated to the domestic market.

Despite that, “Australia’s enormous pension pool remains the number one buyer of Aussie equities”, said analysts Hasan Tevfik and Peter Liu.

And the pair said demand is likely to continue at a steady pace.

“We calculate that superannuation has slowed its buying of local stocks, but this is still running at almost $20 billion per year.”

Although super funds have increased their offshore exposure in recent years, the post-tax dividend yield of 5% offered by Australian stocks will still prove enticing.

“We find no major asset comes close to competing with the post-tax yield on Aussie equities,” they said.

That extra $20 billion of annual demand from Australia’s super industry should provide support for Aussie stocks, given new equity issuance remains constrained.

Tevfik and Liu noted that just $13 billion of new stock was issued by ASX200 companies in 2017, significantly below the long-term average of $37 billion.

And new equity issuance is likely to be even smaller in 2018, leading Tevfik and Liu to ask the question:

“So, $20 billion of Aussie pension money is chasing just $13 billion of new shares. Should we be surprised that equity valuations look expensive in Australia?”

The analysts pointed to the lack of large-scale initial public offerings (IPOs) in Australia as the main factor restricting the issue of new shares.

That’s been compounded by a steady stream of share buybacks, which totaled just over $4 billion in 2017 led by Rio Tinto’s $800 million announcement.

Their analysis includes this interesting chart, which compares the total issuance of different asset classes over the last five years:

The movements are shown in volume terms, to remove the effects of changes in prices.

So the issuance of Australian government debt has risen by 12.5% a year, but growth in Aussie equities has been just 1.6%. And due to share buybacks, total US stocks on issue have actually gone backwards.

While equity issuance remains low, Tevfik and Liu expect to see more activity in mergers & acquisitions this year, amid a supportive backdrop of steady earnings growth and signs of increased capital expenditure.

They included a list of stocks which could be takeover targets in 2018 — each of which have previously attracted buying interest, and continue to look attractive in the current environment.

The list includes Caltex, Nine Entertainment, Santos and Whitehaven Coal and investment company Challenger.

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