Super Slump: Watch Oil

Two bits of information best sum up the stockmarket disaster that was 2007-08 and give a clue as to what lies ahead.

Specifically there’s been a sharp downturn in the number of new floats on the ASX in the six months to June, and the total value of Australia’s superannuation assets is now below the value they were a year ago at June 30, 2007.

In fact both reflect what’s happening in the stockmarket, and what investors think will happen in the wider economy as the year goes on: the battle between inflation and growth will be the big story. Controlling inflation will be the aim of the authorities at the expense of growth, earnings and returns.

So far we’ve seen the damage done from the correction in asset values, now comes the damage to earnings from slowing sales and rapidly rising costs. It’s going to be the big message of the next 12 months.

Already the damage to super fund assets could be of the order of $100 billion or more by the end of this month and that doesn’t include the billions of losses from the collapse of several hedge funds, the losses by market traders and the losses incurred by forced margin calls or sales or the losses incurred by the various companies.

Another indifferent year of market performance will mean more pain for super funds and their investors.

Allco for example will be writing down the value of its intangible assets by around $1.3 billion, write-downs and provisions in the listed trust sector is running at around $2 billion with big losses expected from Mirvac, Valad, APN/UK, Babcock and Brown’s investment satellites, some of Macquarie’s, Transurban and others. Centro’s losses are likely to be of the order of $1.5 billion or more.

These losses have fed through into the asset values of super funds large and small, DIY and corporate, and they will feed through again in the new financial year as the accounting and restructuring accelerates.

When Australian mainstream banks like the NAB, CBA, ANZ and Westpac can trade with a dividend yield of 6% to more than 7% (and over 9% on a fully imputed dividend basis), the market slump has left investor confidence in tatters.

It has only been two solid days of rises Wednesday and yesterday that saw the likes of the CBA and NAB enjoy share prices rise large enough to drop the dividend yield under 7%. The ANZ is still over 7%. Shares will fall sharply today after Wall Street’s 3% slump overnight.

On a full grossed up basis the banks are all on a dividend yield which is more than what they are currently offering for some term deposits which is around 7.5% to 8%.

The plunge in the value of the banks (by more than 30% in most cases, and more) is why the market is off by around 16% from last June; but as the banks really fell from January onwards, it’s why the market is down more than 20% from its peak in November.

That does mask the big correction last August-September when the credit crunch broke, to around 5,790 points, before it drove more than 1,000 points higher to peak in November, powered by the BHP Billiton move on Rio Tinto.

But as the crunch returned in force from late that month, our market tumbled lower through December as Centro led the growing group of higher leveraged companies to be exposed by the full impact of the crisis.

The All Ords hit a low below 5,200 in March as Bear Stearns was saved in the US by the Fed, then followed American markets higher, to peak just above 6,000 in mid May when soaring oil and food prices finally caught the attention of central banks, mainstream commentators and investors, and the current sell off started.

Despite some recent weakness, resources remain the mainstay of the market: if they had been weak as well, we would now be in a fully fledged bear market.

You can argue that the market is ‘only’ down 13% to 14% from a year ago because of the BHP takeover for Rio, the big coking and thermal coal price settlements and above all the huge rise in iron ore prices and the growth of the sector, led by the likes of Fortescue Metals.

This resources boom (with an oil and energy overlay) will help the market through the first half of 2008-09 but from January next year, it will start to get stale as the non-iron ore and coal miners report average to disappointing results.

But by that time industrial shares might be looking to recover and the banks may be stronger, having shaken off the bad debt worries when they report their full year figures in October and November.

But there is a lot of ground to make up. Superannuation returns for the year to June will be bad: the worst for 25 years according to some commentators, with negative returns commonplace and positive returns very rare.

The extent of the damage can be seen from figures released yesterday by the industry regulator, The Australian Prudential Regulation Authority (APRA).

Its Quarterly Superannuation Performance publication for the March quarter of 2008 shows total superannuation assets over the 12 months to 31 March 2008 rose by $37.4 billion (3.5% to a total of $1.10 trillion, despite a fall of $74.9 billion (6.4%) during the March quarter. That is, the gains in the June quarter last year, into the September three months were still enough to offset the losses in the December and March quarters.

APRA said the March 30 asset figure was lower than the $1.14 trillion figure at the end of June 2007. That figure was up a huge $225.4 billion in 2006-07. The financial year now coming to a close will be a very different story.

APRA said that over the March quarter, industry funds’ assets fell by 4.8% ($9.9 billion) to $197.5 billion; public sector funds’ assets fell by 6.2% ($11.3 billion) to $170.2 billion, retail funds’ assets fell by 7.9% ($29.5 billion) to $343.8 billion and corporate funds’ assets fell by 8.8% ($6.2 billion) to $64.0 billion.

“The combined return on assets was -7.7% for the March 2008 quarter. The return for industry and public sector funds was -6.6%, corporate funds -7.6% and retail funds -8.8%”.

Contributions from individuals and employers was $18 billion to funds with at least $50 million (this excludes DIY super schemes).

That gives us a hint of the losses to be reported by super finds for the June 30 year from next month onwards.

With that background, it’s probably no wonder that the number and value of new company floats on the ASX tanked in the six months to June.

A PricewaterhouseCoopers survey shows that only 21 initial public offerings (IPOs), raising $334 million, will be completed by next Monday, June 30.

By way of comparison, 33 IPOs which raised $4.5 billion were achieved in the corresponding period of 2007.

The survey excludes resources, compliance and backdoor listings.

Greg Keys, PwC’s corporate finance partner, said in a commentary that the failure of financial institutions to properly price risk 12 months ago was still working its way through local markets.

He said the number and value of IPOs for all of 2008 will be down on the 91 floats completed last year.

“A notably weak pipeline of floats is apparent heading into the second half of 2008,” he said.

“At this stage, there is only one non-resource company with a defined listing date in July, seeking to raise $3.5 million; although there is a further three floats with listing dates yet to be advised.”

The PwC analysis shows the fall in float activity, both in the number of IPOs and total funds raised, is mainly due to the lack of large cap issues so far this year.

The $500 million fertiliser float from Perth, Burrup Holdings, was postponed twice in the June half of this year. The first was in February in the market turmoil around the likes of Allco, Centro, MFS etc and the second time was earlier this month in the wake of the WA gas supply crisis.

The survey said investor preference has shifted to more stable higher yielding asset classes, such as fixed interest securities and cash.

And this in turn has cut demand for IPOs and seen many companies delay or cancel plans to list until more favourable market conditions and investor appetite returns.

Larger capital raisings have been more difficult to place with investors since the credit crunch hit and debt and leverage became dirty words. The prices investors want to pay are quite often not attractive to vendor shareholders, many of whom are private equity players.

The top five floats in the first six months of this year have raised only $251 million, in contrast with the $3.7 billion raised for the equivalent period in 2007.

The survey pointed out that once floated, investors maintained their disdain for the new companies, with only five, or a quarter, of the 21 first-half floats trading at a premium to their issue prices. The rest were trading at discounts to the issue price.

The survey suggested that a growth area in the next year would be in the renewable energy sector as Australian implements a carbon trading system.

Green technology (as opposed to silicon-based technologies) is rapidly emerging as the growth area in new ventures in the US, especially in and around Silicon Valley and other American technology hubs.

This Information is provided to you by the Australasian Investment Review (AIR).
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