The ASX will rise in Australia this year because there just aren’t enough equities to meet demand.
The number of shares in the market is static, or even shrinking slightly, while the piles of cash seeking an investment continue to grow via superannuation funds.
Credit Suisse’s Equity Strategist Hasan Tevfik says the cost of debt is very low relative to the cost of equity.
“What we’re increasingly seeing is that the debt market is just a more competitive source of financing than the equity market,” he says.
“And individuals, companies and institutions using the debt market are taking out large slugs of the equity market and we’re seeing it every week.”
This means that few equities are being added to the Australian market because companies are using cheap debt, rather than going to their investors or shareholders, to raise cash for expansion or investment.
When Ramsay Health Care sent $1.2 billion buying a majority stake in France’s largest private hospital operator Generale de Sante it did so with cheap finance rather than going to its current investors and issuing more shares to raise funds.
In a normal year about $40 billion is added to the Australian market in equity raising including IPOs and new issues from established companies.
In 2013 it was about $20 billion and this year it could be as low as $1 billion or even negative.
And almost all of the mergers and acquisitions deals at the moment are being financed by debt raised offshore.
Buyers can get debt at a cheaper rate than the percentage return generated by the target company. This means there’s an instant profit. The debt servicing is being covered by the cash generated by the company.
“Again the Aussie equity holder is not financing these deals,” he says. “That’s odd, that’s unusual.
“You add it all up and you get zero equity issuance, probably even a negative … which we call the de-equitisation.
“At the very least, supply (of equities) is not keeping up with demand.
“I think that by the end of this year, once you complete DJs (David Jones purchase) and all the other deals, it’s going to be a minus 1 (billion dollars).”
There are three main ways equities are leaving the market: mergers and acquisitions, share buybacks and companies leaving the ASX (going private).
“In most years gross equities issuance is greater than gross equities retiral by about $40 billion.
Australia’s forced savings system, the superannuation levy, means demand for equities is easier to predict than other places around the world.
“I think demand is pretty consistent,” says Tevfik.
“We have a year end (calendar 2014) index (S&P 200) target of 6000,” he says. “So that should mean capital returns of low double digits
“By far the most unusual point is not the demand side, the unusual point in Australia is the supply side. It’s shrinking.”
However, the exceptionally low cost of debt shouldn’t bring an economic crisis.
“You don’t have that gorging of debt which precedes the blowing up of the debt market,” he says.
Here are Credit Suisse’s forecasts:
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