Abnormal Market Activities in an Unprecedented Time

Investing Psychology, Stocks Jul 8, 2020 / Reading Time: 3 mins
By Edward Heng Reading Time: 3 mins

COVID-19 has led to abnormalities in several stock market activities: trading volumes have reached new highs despite a market sell-off, initial capital has fallen relative to its 2019 comparison, whilst secondary capital has increased, and the number of Initial Public Offerings (IPOs) has significantly reduced. These irregularities can be accounted for by factors that commonly occur during a downturn as well as emerging trends due to technological advancements.

ASX Trading Volume

In March 2020, a large sell-off occurred with month trade volume reaching a high of 67,499,988. This was more than double the March 2019 figure. The increase can be accounted for by the rise in retail investors. During the March period, new accounts represented 21.36 % of all active accounts. Retail investors are joining the market with a bargain hunting perspective, attempting to capitalise on lower stock prices. With technological improvements, it is easier than ever to trade on the stock market due to higher speeds, lower transaction costs and access to more in-depth information.


 

 

Month 2020 2019
Jan 32,169,426 26,555,488
Feb 38,483,894 32,353,562
Mar 67,499,988 32,808,619
Apr 37,618,834 28,054,731
May 32,615,809 36,499,893
Total 208,387,951 156,272,293

 

Figure 1 ASX Table: source, asx.com.au


Initial and Secondary Capital

With Australia experiencing a recession, initial capital has fallen significantly relative to last year. During an economic downturn, there is less incentive to start a business due to a systematic growth obstacle as well as the tendency to increase cash position. On the other hand, secondary capital has greatly increase compared to last year, more than doubling the number on a period-on-period (PoP) basis. Smaller businesses are running low on cash and seek capital to survive, whilst larger businesses look to improve their balance sheet. Firms with high cash reserves will look to acquire companies as their market valuation will be lower. This occurs as business earning expectations are revised and a more conservative risk assessment leads to higher discount rates.


 

 

Date Initial Capital ($m) Secondary Capital ($m)
May 20 7.42 7334.72
Apr 20 96.65 13334.41
Mar 20 1062.59 2116.60
Feb 20 103.68 2044.94
Jan 20 85.84 849.79





Date Initial Capital ($m) Secondary Capital ($m)
May 19 2047.96 2794.55
Apr 19 1188.38 2315.55
Mar 19 130.21 3990.24
Feb 19 112.36 1143.50
Jan 19 34.61  
Figure 2 Initial Cap vs Secondary Cap Table (2019 and 2020), source: asx.com.au


During the 2008 global financial crisis (GFC), we also observe that initial capital plummeted while secondary capital increased.

 

 

 

 

Date Initial Capital ($m) Secondary Capital ($m)
Dec 08 0.0 13,084.1
Nov 08 0.0 8,344.3
Oct 08 184.6 6,659.3
Sep 08 24.2 2,620.0
Aug 08 140.1 5,763.9
Jul 08 1,051.6 5,003.4
Jun 08 238.6 4,967.3
May 08 178.7 2,623.6
Apr 08 4.1 4,315.5
Mar 08 87.8 2,724.3
Feb 08 193.79 2,497.16
Jan 08 354.24 1,416.24
Figure 3 Initial Cap vs Secondary Cap Table (2008), source: asx.com.au

Initial Public Offering (IPO)

The number of companies that has listed in 2020 has dwindled since last year, with just 15 occurring 6 months into 2020. Figure 4 shows the number of companies that has gone public in the last few years. Firms IPO to grow and expand their business, instead, during a downturn firms will target survival and undergo limited growth. This incentivizes companies to defer their IPO on the hopes of higher company valuation from improved earnings expectation and a smaller discount rate.

 


 

 

Year Number of IPOs
2020 15
2019 63
2018 95
2017 113
2016 96
2015 85
2009 39
Figure 4 Number of IPOs Table, source: IPOwatch.com.au

These abnormal activities in the stock market reflect the unprecedented changes happening around the world from the COVID-19 pandemic. Whether some of these irregularities are here to stay, or a one-off blip in the grand scheme of things, only time can tell.