Capital markets have been in the doldrums since the onset of an inflation-fuelled bear market during 2022. If the ‘cycle’ is indeed starting to turn for the better, investors will be inundated with new investment opportunities.
“You know a bear market is nearing the end when investment banks start sacking the MDs,” was the advice I received as a young analyst, just as the tech bubble was unwinding in 2001.
It wasn’t the most comforting advice, given the first round of redundancies (focused on junior analysts) of the global banking community had only just kicked off. Indeed, it would be a few years yet before the senior managing directors were sacked and the new bull market of the mid 2000s was ushered in.
But there is logic to this, in that MDs are traditionally the key revenue generators in investment banks. It is with great reluctance that firms let their rainmakers go. When they do, it is often at a point of heightened pain and minimal capital markets activity. Paradoxically, it is also often a signal of a ‘darkest before the dawn’ moment in the capital markets cycle.
With this in mind, I read with interest a recent article on Bloomberg that MDs were once again in the firing line in investment banks in New York – the heart of global capital markets.
Does this foretell an upswing in listed capital markets activity, or is it reflective of a deeper structural challenge for investors in listed equities?
The NZX is not the only market affected by a lack of new listings
Capital markets have been in the doldrums since the onset of an inflation-fuelled bear market during 2022. The scarcity of initial public offerings (IPOs) and new equity issuance on the NZX, coupled with takeover activity resulting in companies exiting the market, has afflicted the NZX for years.
Adding to NZX’s woes, transport technology company Eroad is the latest listed NZX company to recently receive a takeover bid. If successful, it too will be lost to the local market.
Factors contributing to this dynamic, and potential solutions, have been regularly debated by market participants. In 2019, and formally sponsored by the FMA and NZX, the Capital Markets 2029 taskforce did a great job comprehensively exploring ideas to improve and grow New Zealand’s capital markets over time. I won’t debate the taskforce’s conclusions here, other than to note that the report gives lots of food for thought. It is a worthwhile read.
However, this issue is not limited to New Zealand. Across the Tasman, market commentators have noted recently that the Australian sharemarket is now shrinking in size for the first time since 2005. Like Eroad in New Zealand, ASX-listed horticultural company Costa Group recently received a takeover bid, potentially removing another company from the Australian market.
This has sparked debate in Australia about whether the equity issuance downturn is cyclical, or whether it reflects the changing face of capital markets. The rise of large pools of capital dedicated to investing in unlisted assets has provided companies with a multitude of avenues to fund their capital requirements – they’re not restricted to only listing on an exchange in order to fund their growth.
Are we on cusp of an upswing in equity market activity?
That said, it is far too early to call the death of the listed market. Stock exchanges have served for centuries as a critical cog connecting investors or capital providers, with businesses and entities requiring capital in a free market system. The rules, regulations, and mechanisms surrounding exchanges may evolve, but they’re unlikely to die any time soon.
As if on cue, alongside headlines of senior investment bank job cuts in New York, we have seen early signs of equity issuance activity picking up in equity markets. In Australia, there have been a number of listed companies that have raised equity recently to fund growth or to reduce debt and strengthen their balance sheets. These have been well received by investors.
The first sizeable IPO in more than a year in Australia – of family-owned chemicals distributor Redox – also listed in early July. While its debut as a listed company has been lacklustre, it is still very early days. Market participants both in New Zealand and Australia will be hoping its performance improves over coming months. This would add to broader investor confidence. In turn, it would encourage other companies and investors to come to market.
New opportunities for investors
If the ‘cycle’ is indeed starting to turn for the better, investors will be inundated with new opportunities from companies seeking to raise capital. Some will involve businesses seeking to raise money to fund future growth. Some will involve shareholders seeking to ‘take money off the table’ by listing. Some equity raisings will perform well post-issue, some won’t.
When evaluating these new investment opportunities, it is essential for investors to weigh them up against their own clear, investment philosophies.
Investing is a broad church. Different investment styles and philosophies suit different investors.
Having a clear philosophy and being disciplined in prosecuting that philosophy is key for an investor to successfully navigate the new issuance cycle.
As legendary investor Peter Lynch once remarked: “Know what you own, and know why you own it.”
This article was originally published in the NBR on 11 July 2023.
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