The ASX has never been more opaque

Chief Investment Officer and founder of Aitken Investment Management
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Dealing in the Australian equity market really has changed over the last 20 years, and in my view not for the better.

On Tuesday, a client gave me 125,000 AMP shares to buy at $3.87. The bid was $3.86, the offer was $3.87 and there were 131,300 available. To my stunned disbelief, I saw that despite there being 131,300 shares on the offer when we placed the buy order in the ‘total market’, we only ended up with 123,000 shares. To add insult to injury, we didn’t even have priority on the new bid at $3.87 for our small balance.

The scourge of the market

How does this happen? Because high-frequency trading (HFT) has the technology and speed to pull off an offer and replace it with a bid in the millisecond it takes for my genuine buy order to ‘sweep’ the total market. To my way of thinking, that leads to a false and misleading market.

Basically, my buyer of AMP shares was ‘scalped’ by HFT trading technology. If new ASX management are looking at why ASX volumes are in structural decline they should look no further than this example. My view remains that HFT and other computer/algorithmic ultra-short-term trading strategies are the key drivers of the increased volatility and lack of transparency that is driving investors away from equities.

Genuine liquidity has been replaced by useless scalping volume, volume which ends the day with no net position and only runs interference over genuine users of the share market who have a technology and speed disadvantage. Yes regulators, that means mums and dads as well.

The ASX has never been more opaque in my view; the integrity of the market never lower, and that is a bad thing for all of us. This really needs to change if you want the equity market to play the crucial role it should in funding economic growth and providing reliable income streams to investors. We continue to have a ‘reduce’ recommendation on ASX shares.

Change needed

Australia needs to control its own capital markets destiny. Right now for calendar year 2012, we are the worst performing regional market despite having the best fundamentals. Ask yourself how that happens when we have compulsory superannuation? It all comes down to retail investors who have control of their superannuation losing faith in equities as an asset class because they rightly believe the equity market has become a casino. Double the after-tax yield is available in leading Australian equities over term deposits, yet term deposits continue to attract inflows at the expense of domestic equities. That says it all.

To get retail investors interested in equities again, which is fundamental to gross domestic product (GDP) growth, there needs to be major regulatory and legislative change in how Australian equities are traded.

The first move should be reintroducing broker numbers to improve transparency; the second move would be to outright ban HFT. That is the only way you can start bringing integrity and trust back to equities as an asset class.

Deep value

Yet the good news is a lack of retailer buyer interest drives deep value in high-quality, high-yield, long-duration Australian equities. Unsurprisingly, value and yields have never been better with retail investor interest in equities at all-time generational lows.

For those of us still in the ‘equity cult’, we are spoiled for choice. We are being paid record premiums by Mr Market to simply take a risk in equities.

I need to take a low-frequency investment approach in a world where high-quality stocks are currently priced by high-frequency traders.

ANZ, AMP, BHP, CWN, FMG, NAB, STO, SUN, SVW, TLS, WBC and WPL remain my large-cap high-conviction ideas.

Go Australia, Charlie.

Suncorp Group (SUN): Buy

Suncorp provided an upbeat strategy update on Tuesday. The highlights were as follows: (1) Management is now more confident about the outlook given stronger underlying fundamentals in terms of robust/sustainable top line growth and tight cost control; (2) Suncorp should achieve $190 million in cost savings by 2012 and $235 million by 2013 from the Building Blocks program; (3) the company has upgraded the underlying insurance margin guidance back to at least 12% (+3%), citing better performance in January-May from premium increases, unit growth in the motor book, lower claims especially in the motor book and generally greater GI efficiencies; (4) it expects a further $200 million in cost savings by 2016 from across the GI and Core Bank businesses, arising from simplifying the legal structure, operating platforms and processes, and organisational hierarchy; (5) reinsurance capacity is intact; and (6) Suncorp is more comfortable about capital return prospects with the likely timing to be confirmed at the August results.

  • Last closing price: $7.75
  • Target (12 months): $9.60 (unchanged)
  • Expected capital growth 22.9%
  • Expected dividend yield 6.1%
  • Total expected return 29.0%

AMP (AMP): Buy

We believe in the wealth management theme as revenue drivers turn positive, specifically higher levels of funds under management through higher market levels, improving asset mix and a return of net flows. In addition, we believe there are significant synergies on offer following the AXA-ANZ transaction. We see AMP as a relatively low-risk investment at a fiscal 2012 price/earnings ratio of 11-times, a 7% dividend yield, and with $132 million of remaining cost-synergies yet to be realised. We believe the current share price has not factored in any benefit for the pending cost-synergies, let alone the revenue-synergy potential. We believe AMP is at the lower end of its potential PE band, given the annuity nature of its diversified earnings base and its ability to pay regular and stable dividends despite volatile markets.

  • Last closing price: $3.87
  • Target (12 months): $5.50 (previously $5.70)
  • Expected capital growth 39.9%
  • Expected dividend yield 7.1%
  • Total expected return 47.0%

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Any individual should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

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