As the year draws to a close it is timely to look back on what proved to be a dramatic year for Australia’s equity market and reflect on some of the key investment themes and trends to emerge in 2015, including the surge in IPOs, the popularity of listed investment companies and the success of an active investment management approach.
The Australian sharemarket was characterised by extreme volatility in 2015 with equity prices trading in a 20 per cent range. The market started the year with a bang following a surprise rate cut in February. It reached a high in April then drifted lower before falling sharply through August and September in response to shocks in Asian markets and slowing global growth. In October the market posted its best monthly performance in two years and is now on track to close the year flat.
Malcolm Turnbull’s installation as prime minister in September caused consumer and business confidence to jump in the short term. Business sentiment has remained robust and the impact of the Turnbull Effect on the investment community is palpable, with companies in our opinion now more likely to approve capital expenditure in 2016.
Throughout 2015, the expectation of an imminent rate rise by the US Federal Reserve permeated global equity and bond markets; fear contributed to heightened levels of volatility. With America’s central bank now likely to raise rates when they meet this month, we believe the anticipated rate increase is now priced in.
During the period, a number of investment lessons were reinforced. The well-worn adage “beware of insider sales” was underscored by numerous high-profile examples of board members and executives offloading their stock ahead of negative company updates. It was again proved that “cash is king” as the share prices of a number of highly-leveraged companies collapsed spectacularly in recent weeks as investor confidence has evaporated.
With a number of IPOs slated for December, the total value of initial capital raised by the market will likely exceed $30 billion. There is strong evidence companies that have floated in recent times outperform relative to long-time listed companies. Industry data shows they have outperformed the market on average by more than a third and have better P/E multiples relative to the broader market. Recent research from Goldman Sachs Australia confirmed since the second half of 2013, 80 per cent of IPOs have outperformed the overall market.
In the face of a commonly held and negative perception, over the year companies brought to the market by private equity firms have overall performed very well. Obviously each cycle there are poor performers, such as the recent crash in Dick Smith shares, however as a basket they have made investors money in recent years when the overall equity market has been flat.
A staged exit by management post-IPO has generally been successful over a 12 to 18-month time horizon. Private equity sell-downs have, in most cases, been a positive for investors with the likes of iSentia Group Limited and APN Outdoor Group Limited up 128 per cent and 116 per cent respectively on their offer prices.
The golden decade of listed investment companies has continued with LICs remaining a hit with investors, particularly SMSFs. Investors are attracted by LICs’ ability to pay fully franked dividends and the transparency offered by the corporate structure. The market has responded to this increased demand with a number making their market debuts this year and more to come in the next few months.
In a flat yet volatile market, as seen in 2015, an active investment management style has yielded better results for investors than a more passive approach (such as exchange-traded funds) which merely reflects the index’s performance. For investors and investment managers who hold cash or have a flexible mandate, they have been able to capitalise on opportunities in this year’s fluctuating market conditions. This has especially been the case in the small cap end of the market. Institutional investors particularly have been able to seize on the numerous trading opportunities this year, such as IPOs, block trades and corporate transactions.