They are a vital ingredient in the chemistry of a modern integrated economy, playing a critical role in moving ideas beyond the start-up crucible to the furnace of capital markets which drive economic growth.
But increasing competition from private markets and more innovative global exchanges means Australian public markets must adapt if they are to be fully utilised and continue to generate wealth for Australians.
One measure of whether equity capital markets are performing their role effectively is whether public company listings are growing in line with the growth in company and capital formation.
Australian Securities and Investments Commission (ASIC) figures show Australians are demonstrating entrepreneurial spirit and starting new companies at a solid clip of 4.5 per cent new registrations a year.
Meanwhile, the pool of potential investment capital – in the form of Australian’s $3.5 trillion superannuation savings – continues to grow at an impressive and consistent annual rate of around 8 per cent, according to Australian Prudential Regulation Authority (APRA) data.
Yet, the number of companies listing on public markets is falling.
Australian Securities Exchange (ASX) reports show that over the five years to 2023, the number of public companies listed on the ASX (excluding ASX-listed products, such as exchange traded funds and listed investment companies) reduced at an average rate of 1.7 per cent a year. There are just over 160 fewer publicly listed companies than there were in 2017.
This suggests new good-quality businesses are no longer seeking the local public bourse as their best source of capital. Our public capital markets could be better utilised to benefit the economy, companies and investors.
Australia’s concentrated economy
If we look at the environment in which equity capital may be utilised, we see that over the past two decades, Australia’s economy has become increasingly concentrated on the ‘grow up or dig up’ areas of resources, agriculture and energy sectors, and less reliant on manufacturing. In terms of economic output, manufacturing has decreased by 50 per cent over the past two decades, while mining has increased 330 per cent.
In 2023, around 70 per cent of Australia’s national income and wealth was derived from resource and agricultural exports, Reserve Bank of Australia data shows. Only 20 per cent was from manufactured goods.
Opportunities for reinvigoration
Two key shifts now occurring in the economy present opportunities to better utilise Australia’s public markets.
One, of course, is the well-documented desire from governments to re-engineer the Australian economy away from fossil fuels and towards green energy.
The second, and arguably less widely understood shift however, is the recent and urgent emphasis toward bolstering Australia’s defence and national security requirements in the face of global challenges.
These initiatives are a source of real goals and real projects. The AUKUS agreement for instance commits Australia to $368 billion of projected expenditure into the mid-2050s. A raft of other programs announced focus on future-orientated industries such as energy transition technology, artificial intelligence, cyber, hypersonic capabilities and quantum computing as well as re-homing other advanced manufacturing capabilities to rebalance our economy.
The desire by the government to include superannuation funds and private capital in the programs signals to equity capital markets the opportunity for them to be pivotal participants in the raising of required capital, creating a once in a generation opportunity to ‘fire up’ the capital furnaces of Australia.
We see three ways this could occur.
1. Attract companies to list in Australia
Australia can already point to a successful small-cap mining industry ecosystem. Public markets have also created some large biotechnology companies, such as Cochlear and Resmed.
To encourage greater participation, groups such as the Stockbrokers and Investment Advisers Association could expand their work with government and participants to build awareness and tools to bring innovators and creators together with capital market participants and institutional customers to understand the rapidly changing manufacturing environment. In so doing, they may help manufacturing businesses to accelerate growth by listing on the ASX.
Offshore companies could also be attracted to list in Australia. Around 8% of ASX company listings are outside of Australia, with the largest share in New Zealand and the USA. ASX could expand its focus to find new manufacturing customers in new markets and could also work with its participants, who like Nomura Research Institute, have a global footprint and would help make introductions for them.
2. Develop more diverse financial structures
Manufacturing, energy, defence, and high-tech industries are capital-intensive and require diverse financial structures and products.
Australia has a strong and mature equities market; however, it may be argued that it does not have a "mission fit" corporate bond market. In a 2021 paper on the development of the Australian corporate bond market, the House of Representatives Standing Committee on Tax and Revenue stated this was due to “ongoing regulatory failure and institutional obstructionism” and has led to Australia having a smaller and less liquid corporate bond market than New Zealand, which has a significantly smaller economy.
Government and regulators have been slowly developing the local corporate bond market, with ASX as a leading participant in the process. However, the fact that ASX itself was recently unable to use its own platform to raise debt shows there is still work to be done.
Revise regulations to foster innovation
Improving the technology infrastructure of Australian capital markets is essential to maintaining Australia’s competitiveness on the world stage. However, following the failure of ASX’s ambitious re-engineering project, which was shelved in November 2022, the emphasis on technology infrastructure in Australian equity capital markets has shifted from supporting market innovation to sustaining regulatory compliance and stability.
This risk aversion needs to be balanced against the need for international competitiveness.
If Australian capital markets do not innovate at the rate of their global peers, who are also competitors, they risk becoming technologically moribund and uncompetitive. Opportunities will simply go to other markets. For example, the US, Canada and the UK all have exchange-backed pathways to make it easier for smaller companies to access public capital markets. The UK and Canada also have bourses with a specific focus on junior markets.
Stakeholders here need to work together to remove obstacles to market innovation and improve the utilisation of Australia’s public capital markets. This would support growth and the wealth creation prospects for future generations of companies and investors.
Patrick Salis, chief executive officer, AUSIEX
