Alongside the wallabies, boomerangs and shrimps on the barbie, Australia is famed for its superannuation funds and with it, a lending market that’s as robust and longstanding as the red rocks of the Northern Territory—and just as independent.
But, with a turbulent global market and the risks and regulations that have come with it, the Australian equities industry may be starting to wobble. While there has been plenty of securities available, demand to borrow hasn’t always matched it, leading, ultimately, to a suffering of balance sheets.
Peter Martin, chairman of the Australian Securities Lending Association (ASLA), believes that it may not be the case that demand has dropped, rather that it is not increasing in synchronicity with its Asian peers. Martin believes that, realistically, this can be considered a temporary blip rather than a game-changer, and one that could lead to future success.
He says: “While we have not seen the increase in borrower demand for Australian dollars compared to some peer markets in Asia such as Japan and Hong Kong, the reduction in balance sheet size has led to a reduced long inventory at borrowers that can be utilised to cover their borrowing needs.”
“As leverage is reduced across the board that is something we would expect as a continued trend in 2015, so we should see an increase in demand for borrow from the traditional agent lenders.”
On top of regulation and a general evolution of trends, the market has been affected by fluctuations in global currencies, particularly the US dollar.
Simon Colvin, an analyst at Markit, says: “The value of Australian equities in US dollar terms has been falling over the last few years. Inventory now stands at $200 billion, which is down from $230 billion two years ago.”
“This looks to be partly driven by the recent dollar strength, but comparing to the overall Asian lendable universe, which has managed to grow over this period, one can infer that the growth in inventory levels in Australia have trailed the rest of the region.”
In terms of this wider Asian market, the last few years have seen Australian equities differ somewhat. As seen in Figure 1, between February 2013 and February 2015, the inventory of equities in Asia remained relatively steady, while the long/short ratio of utilisation has seen drastic peaks and troughs at relatively regular intervals. Short sale values saw similar peaks, although with numbers, predictably, on a much smaller scale.
In Australia, as seen in Figure 2, the inventory of equities was much more volatile, especially towards the end of 2014, where a dramatic drop in inventory suggests a fairly severe shake-up.
“Demand has also seen a fall in dollar terms over the last six months,” says Colvin.
“Utilisation is up over this timeframe so the fall in demand to borrow has not been as stark as that seen in lendable. This contrasts with the overall Asian universe, which has seen flat utilisation over this time.”
While, in average terms, demand may not have seen such a steep drop, in general, over this time period it has been considerably less predictable than in the rest of the region. Again, there is some correlation between short sale values and utilisation, most notably around November 2014, when an increase in short selling led to a spike in utilisation of 8.08 percent.
The same trends are also apparent in the Australian market, to an extent. Similar peaks appear in each March and September, yet these are surrounded by other increases and unexplained dips, many almost as large, or even larger than those pan-Asian fluctuations.
In the continent as a whole, the incremental increases can be explained by some biannual event; results or reports are a likely possibility. The Australian market, however, is more likely to be affected by local events such as IPOs, company re-launches and even specific economical changes.
Colvin cites fees as one of these particulars, saying: “Fees have fallen over the last year so this has had some impact on the region. Whatever loans people are making, it is a lower average rate than a year ago.”
But, according to Martin, this is just one of many domestic changes coming in to play before the year is out.
He says: “The other theme developing in 2015 is balance sheet financing. There is a greater demand to borrow the high quality Australian dollar government bonds to satisfy the local Australian Prudential Regulation Authority capital requirements as well as those of offshore jurisdictions.”
“We are seeing greater demand for the collateral upgrade trade, especially across asset classes with borrowing bonds versus equity collateral increasing.”
Increasing obligation to hold on to collateral could explain Australia’s generally looser ties between utilisation and short selling, as buyers opt for longer-term investments that put more capital in their accounts with a little less risk.
“Term financing is also becoming a more common request for the capital benefits that it provides,” says Martin. “The lines between the securities lending desk and the financing function within counterparts are overlapping more than ever.”
That’s not to say though, that short-term investments are consigned to the past, or that they’re any less desirable.
Speaking just after these results, Colvin explains that, instead, we may be looking at a change in players on the short selling market, with specials beginning to dominate.
“Natural resources firms have always been a key focus of short sellers in the region and the recent rout in the likes of copper and iron ore looks to have proven them right.”
“In the wake of the recent underperformance in these shares we have seen some signs of covering in the last few weeks. Materials names now make up 40 percent of the Australian shares trading special. Energy shares make up the second largest group of shares on short sellers minds.”
While it may not dance to the same tune as the other Asian giants, and its markets may take dramatic twists and turns, the Australian market is one simply in transit, by no means in turmoil.
Changes, particularly regulatory changes, can be taken as opportunities, and they are certainly something that Martin and ASLA are embracing. The association is, in fact taking regulatory change and piggybacking technological advances off of it.
“As well as promoting best practice through transparency to beneficial owners and product innovation amongst lenders and borrowers, encouraging market efficiencies through automation is another ASLA objective for 2015.”
“There is a much greater understanding of where the risk lies for lenders and how they can run their lending programme to mitigate that. We see a much greater ‘hands on’ approach now from lenders who are also benefitting from the greater transparency and reporting they are now demanding from the agent lenders.”
In true Aussie style, the market down under will take the peaks and troughs as they come, remain unperturbed by the wider workings of Asia, and celebrate the changes that are just around the bend, maybe even with a tinnie or two.