Is no News bad news for ASX?

News Corporation’s proposed move to reincorporate in the US has given the players in Australia’s equity markets serious cause for thought. The cause of alarm has been News’s disappearance from the Standard & Poor’s Australian indices, and initial reaction at the prospect of losing the sharemarket’s biggest listing company stopped somewhere just short of outright horror as the media, investors, brokers, analysts and the key decision-makers at the Australian Stock Exchange hypothesised on the outcome.

Would the loss of such a substantial company deliver a serious body blow to the ASX? What would be the impact on the market’s liquidity? Was this the death knell for overseas investment in Australia? Will News’s move start an exodus of Australian companies seeking larger capital markets – a case, perhaps, of ‘today News, tomorrow Westfield’?

Time already has delivered a keener perspective. The answer to all of the above is fairly assuredly in the negative. While some are still scratching to find anything positive about the announcement of News’s plans to relocate – the final decision on the move will not be made until a shareholder vote this month – the ensuing analysis, re-evaluation and constructive thinking has thrust Australia’s consciousness into a heightened global awareness.

There’s some good news anticipated for Australian investors, large and small, as the News move from the Standard & Poor’s [S&P] ASX indices – against which many local fund managers benchmark their investment mixes – is expected to deliver a market with less volatility. With its listing on the New York Stock Exchange, News will become part of the S&P 500 Index, which will preclude it from being part of Australian indices, although it will still retain a listing on the ASX.

'[The Australian market] will become more defensive, with higher yields and more secure dividends,' predicts AMP Capital Investment’s chief economist and head of investment strategy Shane Oliver. 'In the near future, there will be the same amount of capital chasing fewer stocks. It’s swings and roundabouts though,' he warns, 'as we may lose some growth potential.'

Not all will be sorry to see the back of Murdoch’s media behemoth. 'News was always an exciting ride, but you didn’t buy it for stability. It’s a great global success story that has bounced around like a small company,' observes one stockmarket player.

Most immediately, brokers are anticipating a huge surge in business as trading volumes increase. Conversely, fund managers, as the custodians of much of Australia’s burgeoning superannuation wealth, are bracing for immediate inconvenience and expense, as many will be forced by their mandates to sell News and substitute it with new stocks.

Early fears that this would be an overnight panic move have been allayed by the Standard & Poor’s decision to allow the transition of News from its Australian indices over a nine-month period.

The impact on the indices will be apparent, as News represents 7.5 per cent of the ASX market capitalisation. There’s expected to be a skewing of the indices giving more weight to banking, finance and property. Suggestions that other media stocks may be sought to replace News’s excitement may be ill-founded. Derek Francis, the senior consumer discretionary analyst at Commsec, Australia’s biggest retail broker, believes active fund managers whose portfolios are not tied to indices, and other investors, will continue to buy News shares.

Fund managers who choose to stick with News will have to make a call on whether it will beat the Australian market, says Hans Kunnen, head of investment markets research at Colonial First State. 'They will need a good reason to hold it.'

However, what was first considered a state of emergency, is now accepted with some calm with managers such as Kunnen audibly contemplating whether the shift will be noticeable.

Meanwhile, the ASX, in the wake of very timely annual results – a 2003-04 profit of $82.7 million – is seizing the opportunity of the News exit to strut its stuff, crowing about the resilience of the Australian sharemarket now with $840 billion in market capitalisation and 85 per cent liquidity (or turnover) and its capacity for growth.

Far from being nobbled, 'the Australian market is now so diverse and has grown to such a point that it can absorb these moves,' declares the ASX’s soon-to-retire managing director and CEO Richard Humphry, at the same time acknowledging that the negative impact may be felt to the tune of 2.5 per cent of ASX turnover. Despite the squawking of what Humphry calls the 'chicken littles' when News first made its announcement in April, he remains confident the sky is not falling. 'This has been long expected,' he says.

'What’s overlooked is that last year alone, the Australian capital markets grew by $120 billion which is almost twice the total market capitalisation of News. Australia is already punching well above its weight for a country with a 20-million population. We have the eighth largest market in the world. Our share ownership per head of population (by mums and dads) is outstripping any country, including the States.'

Despite all this, in global terms Australia remains little more than a faint blip on the screens of international investors. The expected News move has highlighted the entwined issues of attracting capital to Australia and keeping our companies from following the Murdochs’ lead and seeking bigger capital pools offshore. On the latter, Hans Kunnen suggests we take a reality check. 'News was already a global player, whereas most Australian companies are a much harder sell in larger, less familiar markets,' he says.

The big lesson from the News move is that we need to adjust our focus, insists Humphry, referring both to the Australian market as a whole and the ASX as an organisation. 'We are in a global market. We just need to get used to the idea.' Humphry is not alone in this view.

Commsec’s Derek Francis believes Australian fund managers who are tied to locally focused indices are handicapped. He is urging them to rewrite their mandates, the rules that tie their portfolios to geographically limited indices, such as the S&P ASX 200, so their funds can invest in global companies.

'One possibility would be to allow investment in Australian companies on the [US] S&P 500 that retain a percentage of operations here,' he suggests.

Humphry concurs, dismissing fund managers’ mandates as anachronistic. 'We need to span national boundaries and think more about sector analysis. It’s the next step in the evolution of markets,' he says.

In his decade at the ASX, global expansion has been uppermost in Humphry’s mind as he has positioned the ASX to lead the charge for Australia’s now strong equities culture. Mallesons Stephen Jaques CEO Tony D’Aloisio will assume the ASX chief executive’s role later this year.

The only way to keep companies happy in Australia and to attract overseas investors is by continuing to grow market capitalisation and the liquidity of the market, Humphry argues, and there are two obvious methods. The first is to increase the number of ASX listings. Humphry foresees a growth spurt coming from the listing of increasing numbers of infrastructure companies dealing with the needs of Australia’s aging population, to take the ASX market cap past the trillion dollar mark. The second is through forging links with other markets. Consolidation breeds efficiency. Benefits would come not only in boosting the size (and therefore the allure) of the capital pool but also from consolidating the clearing and settlement functions for equities trading.

In principle, many support the notion of a merger of the ASX with a foreign exchange. Commsec’s Derek Francis says the appeal of increased liquidity for investors is blatant.

Humphry, who was responsible for the demutualisation of the ASX in 1998, was subsequently thwarted in his attempt to take over the Sydney Futures Exchange in 1999, when the then head of the Australian Competition and Consumer Commission, Alan Fels, denounced the move as anti-competitive. 'But for the ACCC and the now higher price tag, the merger could be back on,' he says.

Instead, energies have been directed towards an alliance program exploring ways to grow the ASX by forging international ties. To date, there are alliances with the NASDAQ, the New York Stock Exchange (NYSE), and the American Stock Exchange (AMEX) in the US, and a trailblazing reciprocal arrangement with the Singapore Stock Exchange allowing brokers in both markets to trade directly with the other. Discussions are underway with Toronto and the Deutsche Boerse, among others. The actual merger path, however, is littered with obstacles.

Often mooted is a takeover of the New Zealand Stock Exchange, a move dismissed by some as relatively insignificant when the size of the two markets is compared. However, the problems involved in such a move, whether it’s trans-Tasman or with an Asian market, are the same. 'It strikes at the heart of sovereignty. At the moment each market goes on its own corporations law with its own sovereignty,' Humphry says. Take the case of an Australian–New Zealand merger: 'Because Australia is the dominant market, New Zealand would have to adopt our corporations law.' Currency and tax laws also conflict.

When attentions shift to South-East Asia, the issue becomes arguably more difficult, although Humphry, a strong advocate for the harmonisation of international financial reporting, is quick to point out the benefits of merging with a market such as Singapore – which with around A$318 billion in market capitalisation is a significantly deeper, more liquid market, similar in size to France’s.

When it comes to capital markets, as the News move has highlighted, size matters.

'Most of the countries in our region are former colonies of former powers. They guard their sovereignty jealously.'

While not ignoring the possibility of creating further connections with North America and Europe, Australia’s greatest potential is widely believed to lie on the doorstep, in the Asian region. However, there is a relatively short-lived opportunity, according to Humphry.

With the exception of China and Japan, Australia has the largest economy – around 45 per cent – of the South-East Asian countries.

'We are a dominant player now,' he says. 'In three to four decades, this market in this time zone is going to rival anything in Europe or the US. We’ll be thinking of the world in three time zones. With the development of China and India, it is going to become extraordinarily dynamic and whoever has the deepest, most liquid market is going to attract the bulk of investment.'

This is big picture stuff that goes way beyond the short-term profitability of the ASX, and is a theme that Tony D’Aloisio is tipped to pursue eagerly when he takes up the CEO’s role.

As Humphry sees it, ensuring our strength as an Asian economy is a public policy issue. Anxious for Australia to have a seat at the regional ministerial decision-making table known as ASEAN Plus 3, he has made his opinions known to government.

Harmonisation of stock exchanges is already a major agenda item for the East Asian and Oceanic Stock Exchanges Federation of which both Australia and New Zealand are members. The International Organisation of Security Commissions has also acknowledged the need. As negotiations for a free trade agreement between Australia and China gather momentum, the market synergies will be evaluated.

In the interim, the ASX is displaying leadership, with countries in South-East Asia having adopted Australian legal mechanisms.

As the ASX enters a new era with a new chief, a considerable market adjustment in farewelling News Corporation and a dynamic, if positively strengthening, economic climate, the coincidence of influences calls for some strategic navel-gazing. 'What are we?' asks ASX public affairs spokesperson Gervase Green.

Beyond the public face, he says, 'we’re an infrastructure toll operator, financial services provider, technology company, regulator, provider of investor education and an onseller of market data. We are a modern conglomerate – and that must be faced in deciding our future'.

ASX out points Asian exchanges

When the future of the Australian Stock Exchange is considered, attentions typically are focused on South-East Asia, and most immediately the possibility of furthering links with the exchanges of Hong Kong and Singapore. Both markets can deliver access to emerging China plays.

The ASX already has ties with Singapore making it easier for Australians to trade Singaporean stocks. In terms of size, the Hong Kong exchange is bigger. Its market capitalisation is $986 billion, with the ASX’s $840 billion. Singapore is much smaller at $318 billion.

However, closer relationships will be forged in the wake of a recent study of the world’s 38 major exchanges by Peter Swan, head of the University of NSW school of banking and finance, and Joakim Westerholm, a senior lecturer at the University of Sydney. (Source: The Impact of Market Architecture and Institutional Features on World Equity Market Performance by Professor Peter Swan and Dr Joakim Westerholm)

The study ranked the ASX way ahead of both these Asian exchanges in terms of the effectiveness of their design, efficiencies and transaction costs.

Hong Kong and Singapore are set up as relatively simple electronic limit order book markets in which traders post bids and asks. The study showed Singapore ranks 25 in the world from lowest to highest transaction costs (as measured by the trade weighted effective spread) and Hong Hong at 29. The ASX rates at number five.

When the effectiveness of design was rated, Hong Kong and Singapore came out at 22 and 23 respectively, whereas Australia sits at 12. According to Swan, these results are largely due to the transparency of the ASX, which has adopted design features that make it more appealing to traders. Neither Hong Kong nor Singapore 'do well' with respect to large or medium stocks but they do better than ASX with small stocks, he says.

'The ASX is well represented among the world’s largest stocks, which gives it a clear advantage,' says Swan. Singapore ranks 22 in terms of trade size and Hong Kong 28 – the ASX is 16 (has bigger trades). Hong Kong and Singapore have room for improvement by upgrading their design, reducing trading costs and raising traded value.'

One of the features of the Hong Kong exchange is its relative volatility. In Swan and Westerholm’s survey it was ranked 14, compared to Singapore’s low 31.

Hong Kong is considering a 'circuit-breaker' system to limit trading in volatile shares in an effort to stabilise its market. Circuit breakers stop trading in a stock, or even the entire market, if prices move too far, too fast. Calls for reforms came after shares in Far East Pharmaceutical Technology plunged 92 per cent in June.

This article was written by Deborah Tarrant, a freelance business writer.

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