Wary investors wait on RBA to move on interest rates

For the first time in more than a decade, total new IPOs raised less than $1bn last year and some of the investors who did chance their arm found themselves suffering big losses on some particular stocks. Picture: NCA NewsWire / Gaye Gerard

While the Australian stockmarket and economy have done better than anyone would have expected a year ago, local investors are still wary.

This was the message from the latest IPO Watch report from accounting and advisory firm HLB Mann Judd, which has been studying the new listings market in Australia for the past 20 years.

After the worst year for new listings since the firm began its annual study in 2004 – with only 32 new IPOs on the ASX last year compared to 87 in 2022 – they say investors are even more wary this year as they wait for more news on what the Reserve Bank will do about interest rates.

For the first time in more than a decade, total new IPOs raised less than $1bn last year (only $847m) and some of the investors who did chance their arm found themselves suffering big losses on some particular stocks.

While the US market has done well recently, on the back of more certainty about the US Federal Reserve Board cutting rates this year plus the additional fuel of artificial intelligence boosting certain stocks, HLB Mann Judd executives say that Australian investors want to wait and see what the RBA is going to do before putting their money in new floats.

At the moment there are only five new IPOs listed for the ASX this year (in addition to the dual listing of Canada’s Capstone Copper, which is slated to come to the Australian market next week.)

The big news that the market is waiting for is the listing of Virgin Australia, which is expected later this year if the stars align.

But the firm says investors here want a clearer idea of where local interest rates are going before they invest in new companies. There’s also concern about low prices for lithium, nickel and rare earths.

While tech stocks dominate parts of the US market, the Australian market has more of a commodity focus – and the end of 2023 and start of 2024 have seen disappointing news on commodity prices, which boomed in 2022.

IPOs need a combination of both institutional investors and retail investors to gain the necessary breadth of shareholding needed for an ASX listing.

HLB Mann Judd says retail investors in Australia at the moment are cautious, preferring to put their money in blue chip dividend-paying stocks where they can enjoy the benefits of franking credits.

That said, the firm says that there are companies waiting in the wings that could be ready to list if market conditions change and sentiment improves.

The next real indication of the Reserve Bank’s thinking will come when the board has its first meeting for the year on February 6.

Interestingly, the firm’s cautious attitude on the outlook for 2024 is not shared by ASX executives themselves who arguably have a clearer line of sight in what might be coming down the pipe later this year.

ASX’s group executive, listings, Blair Beaton, and general manager listings, James Posnett, who both spoke to this reporter after the release of the HLB Mann Judd report, paint a much more upbeat picture for 2024.

The ASX official figures on new listings are higher than the ones used by HLB Mann Judd because they also include overseas companies that list on the ASX, creating dual listed structures.

The ASX executives argue that last year also saw the listing of US gold giant Newmont on the ASX in October, with a market cap of $60bn.

Before that, US gaming company Light & Wonder also had a secondary listing on the ASX in May, with its market cap currently more than $11bn.

They argue that dual listings add to the depth of the Australian market and could offer Australian investors a broader variety of stocks to invest in, including future capital raisings. Beaton and Posnett indicate that there are considerably more potential listings in the pipeline than the HLB Mann Judd report (which largely looks back at the events of 2023 with comments about what it is seeing in the market right now) would indicate.

They say the ASX is hoping to benefit later this year as private equity owners who have held companies for seven to 10 years look to offload more of their investments.

They argue that 2021 was a boom year for new listings for the ASX – the best since the previous boom year of 2007 just before the Global Financial Crisis – which inevitably means some slowdown in subsequent years.

They also argue that 2023 was a tough year for all exchanges around the world in terms of new listings because of rising interest rates and economic uncertainty.

But they point out that sentiment and activity picked up in the second half of last year.

“This year is going to be a lot more active than last year,” says Beaton.

“There is a lot more pent-up demand which is currently sitting on the sidelines.”

They argue that the current level of the ASX 200 VIX (an indicator of volatility) has been below 15 for some time – it’s now at just under 11 – paving the way for more investor confidence in the outlook for the market.

The difference is that HLB Mann Judd is a very local firm looking at new local listings, including from Perth which hosted the largest number of new IPOs last year, many of them small mining companies.

It is also talking to their local clients, while the ASX is pitching its wares on a global stage, trying to attract companies from the US, Canada, New Zealand and elsewhere to have new listings or secondary listings here.

It could be a year of two halves for ASX investors, with the second looking a lot stronger than the first if there is a clearer pathway for Australian interest rates to come down by the end of the year.

Higher local rates are impacting the valuations of new companies and the revenues of existing companies exposed to the consumer market. Australia’s vulnerability to commodity price booms and busts is another factor affecting local sentiment.

ASX executives have an interest in selling the market but HLB Mann Judd’s clients are still wary.