Recent form doesn’t provide much reason for enthusiasm when it comes to some upcoming floats.
IRRATIONALLY exuberant; that’s one way to describe the optimism of the promoters of 30 companies lining up to float on the ASX, perhaps hoping no-one will compare their offerings with the multiple duds floated since the start of 2010.
Most of the 36 stocks that made it to the market in the first eight months of this year have struggled to stay afloat.
It is the poor track record of the 36 that raises a number of questions, starting with why there are 30 more at the starting gate, a rapid acceleration of average monthly initial public offerings.
Until the end of August, the IPO average was 4.5 a month. With 30 on the list, and undoubtedly more to come in the final four months of the year, the average is already out to 7.5 a month, which is roughly a doubling in float activity.
The float flood would easily be an example of the “irrational exuberance” mentioned by a former head of the US central bank Alan Greenspan. He coined the phrase when describing over-valuations in the stock market during the dot.com boom of the 1990s.
Greenspan’s observation was similar to the ‘animal spirits’ remark made 60 years earlier by another economist, John Maynard Keynes, who was searching for a way to explain why people prefer to do something rather than wait, even if doing nothing is the better option.
The two ASX float lists (what’s been and what’s coming) are loaded with animal spirits and irrational exuberance because even though Australia is performing well economically, if not politically, the rest of the world is struggling to gain the traction required for a long-term, sustainable, period of growth.
It is the painful process of standing still which people, especially investors, find hardest. We are all born with an urge to keep moving, if only to be seen to be doing something.
Just how wrong that attitude has been can be measured by the way the stock market has bobbed up and down during the past year. The only people making money have been the brokers, clipping their fees off trades as punters hunt a better performing stock when there really isn’t much happening.
The float scorecard of the year’s first eight months tells the story rather neatly. Of the 36 IPOs that made it to listing, 23 are now in red. They are losers, trading below their original issue price. In percentage terms, if you had invested in any float this year you have had a 64 per cent chance of losing money.
Over time the failure rate of IPOs steadily worsens. Of the 36 floats, nine posted a first trade below their issue price – an instant loss for investors. By the end of the first day’s trading 13 were underwater – almost an instant loss. At the end of the first week, 16 of the 36 were in the red, and one month after listing 23 floats had sunk.
Two of the 36 have been outstanding successes. Hunnu Coal has risen by more than 300 per cent from an issue price of 20 cents to recent trades at 88 cents. Doray Minerals is up more than 200 per cent from 20 cents to 75 cents.
But two winners out of 36 starters equals a 5.5 per cent chance of success; horse-race odds, not an investment ratio.
The high past failure rate makes the current list of 30 proposed listings extremely interesting reading and says either that company promoters can sniff a positive change in market sentiment, or they are playing to our animal spirits and the need to do something with our money; or they might even be pricing their IPOs with something left in them for investors.
Of the 30 IPOs on the ASX list, 22 are mining and oil stocks, followed by a grab bag of technology and industrial stocks.
Somewhere in the next 30 there might be another Hunnu or Doray. Then again, there is always a horse race somewhere around Australia on the weekend.
Tax dodgers
SUPER taxes of the sort that has caused so much controversy in the Australia mining industry have been tried in other industries elsewhere, and failed.
In a useful wake-up call for Canberra, a top man in the last British Labour government has acknowledged that its super-tax on banker bonuses has failed on several levels. It failed to stop the game of bankers rewarding themselves outrageously, and it failed to stop the migration of talent out of Britain.
Alistair Darling, the Labour chancellor of the exchequer (treasurer) who introduced the bonus super-tax, told the Financial Times in London that the tax had “failed to change the banking industry’s behaviour”.
But in a useful pointer to the possible effects Australia’s mining super-tax, Mr Darling said the failure of the bank bonus tax was largely because of the “imaginative ways” the bankers had thought up to avoid paying a 50 per cent tax penalty of bonuses of more than £25,000 ($43,000).
Pricing British bankers out of the global market meant that some of the best moved to New York, Switzerland and Asia, just as pricing Australian mining out of the market will result in mine investment capital migrating to Africa, South America and Asia.
The current generation of mines can’t move but the next generation can be relocated to more attractive tax environments – and that’s before the miners use their imaginations to avoid Australia’s super tax in the same way British bankers dodged their super-tax.
The downside
IF some of your recent reading has seemed excessively gloomy about the economic outlook, consider what the clients of French bank Societe Generale were told last week – to prepare for a possible ‘global economic collapse’ over the next two years, and make investment decisions on that worst-case outlook.
According to SG, in a super-bear market the US dollar will slide further, share prices will crash, property will tumble (again) and the oil price will fall to $US50/barrel because governments around the world are bankrupt and there’s nothing left to stimulate industry.
SG’s view might not be right but it shows how gloomy some people are.
“No man but a blockhead ever wrote except for money.”
Samuel Johnson
