Weekly Wrap by Pythagoras Investing: Et Tu Brute?

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Capital raisings set to continue

The uncertainty about the impact of the pandemic has sparked many capital raisings on stock exchanges around the world. Australia has raised $30bn of capital from the beginning of the year to the start of August 2020. In fact there have been 205 placements between May and August – aided by a relaxation of a listing rule.

Why are companies raising capital in the middle of a global pandemic? Some reasons include:

  • To aid liquidity as revenue temporarily dried up during the pandemic, and
  • To shore up balance sheets or to bolster their regulatory capital positions, and
  • To pursue acquisition and growth opportunities that may arise.

This is a similar pattern to the GFC where just under $100 billion was raised by S&P/ASX 200 entities in 2008 and 2009 through 279 separate capital raisings.

America. Back to its February highs

By comparison to the US, our banks have weighed down the Australian market.  The reason our market is further behind in its recovery of returns is due to the domination of the banks which are approximately 25% of the ASX200 index.  Banks are still down 28% from their highs in February 2020.

Believe it or not, banks are the biggest residential real estate participants in the Australian market. Right now banks are being used as the shock absorber for the economy.  They have effectively been “asked” to be generous to clients by taking some of the stress out of repayments, for now.  Shareholders are therefore being asked to shoulder the burden.  Tough times for banks inevitably lead to investor misery – especially when they are such a large part of the Australian market.

This explains why our banks are slow to recover and why our index is lagging the USA.

Et tu, Brute?

Chinese diplomat Wang Xining said China believes it has been wronged by Australia’s push for an independent inquiry into coronavirus.  Australia’s sins:

  • The Australian Government never consulted the Chinese Government in whatever way before the [inquiry] proposal came out.  This was an affront to the strategic partnership – lacking courtesy and diplomacy.
  • China believes Australia’s push for an inquiry was at the behest of the United States.  At that time Trump was attempting to blame coronavirus on China.

All of this was when China was coming out of lockdown.  Mr Wang conveyed the  indignation, anger and frustration the people expressed at Australia’s “shocking” proposal.  This comes at a cost.

Wang also confirmed that China has no intention of becoming a democracy – as expected by the West.  This appears to be new news to the media. 

The outcome for Australia – trade sanctions in a few billion dollars of Australian exports with more to come.  And the cold shoulder… so far. 

Kicking sand in the faces of our biggest trading partner seems to have had an impact.