The year of trading dangerously

If investors thought that the blood-letting of 2008 was over when they returned from their summer break earlier this year, they were sorely mistaken. The S&P/ASX200, which had once held well above 6000 points prior to the global financial crisis, would shed nearly another 600 points between January and March before it reached its bottom of just above 3100 points.

Between January 2 and March 6 the market fell from 3713.8 points to 3145.5 points as concerns about banks' exposures to derivatives stripped away the confidence of investors and took the total losses of the market from its all time high on November 1 2007 of 6828.7 points to 54 per cent. The fear in early March was palpable, but the economic peril was very real, as Alan Kohler noted at the start of the tumble: "A dangerous, rather idiotic idea is beginning to sprout, or perhaps re-sprout – that we have nothing to fear but fear itself."

A number of respected commentators thought the rot could go even further, with Morgan Stanley's Gerard Minack writing that "the ongoing declines offshore suggest a possible under-shoot” of below 3000.

But offsetting this uncertainty, and the saving grace for Australian equities, were signs that China's economy would buffer Australia from the global economic downturn and that government stimulus packages both here and abroad would lift the economy. It turned out not to be far off the mark. Despite some initial reverberations, China's economy continued to grow at a considerable pace and Australia side-stepped a technical recession.

Australia's stock market responded positively, beginning its upward climb in March to the year's peak of 4859.9 points on October 15. The market has since come down from this high and as we approach the last days of trade for the year it is holding above 4600 points.

While banks around the world continue to struggle over the year, their Australian peers bounced back from a disastrous 2008 to rise 27.8 per cent per cent for the period of January 2 to December 18 – thanks, in part, to the government's wholesale funding and deposit guarantees.

Though as markets improved, our larger banks were able to begin foregoing the wholesale funding guarantee and the associated costs. Indeed, in early November Reserve Bank governor Glenn Stevens told a Melbourne audience: "I myself think we're getting pretty close to not needing it”, adding that in the past month most of the banks' issuance "has been unguaranteed, even offshore”.

Our miners also posted solid gains overall, with the XEJ Index rising 23.3 per cent between January 2 and December 18. The consumer staples index also performed well up 21.16 per cent during the same period. The A-REIT index was the worst performer, losing 4.6 per cent from the start of the year to the close of last week.

US and overseas equities

Over in the US, the fortunes of the Dow Jones were (surprise, surprise) virtually a bigger mirror image of our own index. The Dow Jones Industrial average fell from 8772.25 points on January 2 to 6547.05 points on March 9, its bottom, before starting the march upwards past the 10,000 point mark in December. At the close of last week the Dow Jones had risen 17.75 per cent for the year to 10328.89 points.

The UK market fared similarly, starting the year at 4434.17 points, before sliding to its bottom of 3512.09 points on March 3. In the past nine months, the FTSE has added around 800 points to close out the week ending December 18 at just below 5200 points and 17.2 per cent higher.

In Asia, the Nikkei was outclassed by both the Dow Jones and the FTSE 100. The index rose from 8991.21 on January 5 to 10142.05 at the end of last week – a yearly gain of only 12.8 per cent.

In China the story was very, very different. The Shanghai Composite, which tracks both A and B shares, gained – wait for it – 68.4 per cent from January 5 to December 18. This may shed some light on why Fidelity Investments' Anthony Bolton has decided to delay his retirement for a foray into the Chinese market. However, it should be noted that like many emerging markets the Shanghai Composite is still yet to regain its 2007 high.

Capital raisings

Possibly the most significant development on the Australian stock exchange over the year was the vast number of companies returning to the market in search of capital injections.

Taking advantage of Australia's accelerated capital raising structure – which allows companies to issue underwritten shares without having to issue a prospectus, thus speeding up the process – Australian companies raised at total of $90.18 billion in secondary capital in the eleven months to November. This represented a healthy (or unhealthy depending on your position) increase on the same period in 2008, when $46.94 billion was raised. As Stephen Bartholomeusz wrote in July, the accelerated capital raisings meant "the Australian market has been able to supply equity to meet the escalating demand, where other markets weren't.”

A-REITs were some of the first to tap the market, as the once highly favoured listed property trusts sought to slash their gearing and absorb asset write-downs. The second, and much larger, wave of raisings occurred in the financial services sector with all of our big banks raising capital to shore up their defences, and as it turned out, make acquisitions.

IPOs

2009 will never be called the year of debutantes, and with good reason – less than 30 companies listed on the exchange during the period, raising a total of $5.58 billion in capital. Not surprisingly for the Australian exchange, the majority were speculative mining plays, which raised very little cash. However, there were a couple of 'floats of note' which made up the bulk of the ASX's new capital gains.

The first noteworthy cab (or car) off the rank was Carsales.com's $1 billion-plus float on September 10. After issuing at $3.50 per share, the stock is steadily climbing and closed at $5.00 on December 15.

The biggest float, in terms of substance and pizzazz, was TPG's $2 billion re-launch of family favourite Myer. With a solid brand, strong sales results and one-time Miss Universe Jennifer Hawkins supporting the float, Myer One loyalty card holders and institutional investors responded in droves. The stock, however, closed December 18 at $3.68 – a dress size or two below its launch price of $4.10.

Specialty retailer Kathmandu listed 11 days later, raising $340 million in initial capital for the company. The relative success of both retailers in listing was seen as a reflection of the returning appetite of market participants (both retail and institutional), as noted by Stephen Bartholomeusz.

And with gold stocks holding up nicely during the crisis as investors around the world sought safe havens, the listing by Canadian miner Eldorado Gold, which took over locally listed Sino Gold Mining for $2.15 billion in September, was warmly greeted by the market with the stock holding above its debut price of $14.25 since listing on December 7.

Delistings (so long, farewell)

This year the market waved goodbye to 44 companies (of which only three were foreign) with crisis victims Babcock & Brown and Commander Communications the most notable. Mergers and takeovers saw Lion Nathan, ABB Grain, St George, GRD and very recently Felix Resources depart public life.

Notable transactions

While merger activity was generally contained, there were a number of high-profile deals between Australian resource companies and Chinese state-owned enterprises (SOEs).

But the biggest deal of the year was the one that never happened. After months of negotiations, Rio Tinto ditched Chinalco, opting instead for a massive capital raising and a $US116 billion iron ore joint venture with BHP Billiton. The capital raising went off without a hitch, but the joint venture still faces hurdles with competition regulators in Europe.

OZ Minerals, Felix Resources, Lynas and Fortescue also caught the attention of Chinese miners. With metal prices depressed and many of our miners indebted, most deals were welcomed, though the success of these deals ultimately hinged on the responses of the Foreign Investment Review Board.

While the FIRB cleared Hunan Valin's 17.5 per cent stake in Fortescue and the $3.45 billion takeover of local coal miner Felix Resources by Yanzhou Coal Mining, it blocked Minmetals' original takeover plan for OZ Minerals, citing security concerns. It later cleared a revised offer for the majority of the local miner's assets. Later in the year the FIRB also blocked China Nonferrous Metal Mining (Group) Co's deal to buy 50.6 per cent of rare-earths miner Lynas Corp.

In recent weeks treasurer Wayne Swan has tried to allay concerns that Australia's foreign investment rules are unclear and the findings of the FIRB highly variable. However, not all investors are convinced, with an industry source in China telling Reuters: "Frankly, the Chinese are only interested in how the last deal gets treated and whether the goalposts continue to shift."

While the deals between local miners and Chinese SOEs made headlines, billionaire investor George Soros made far fewer waves with his smaller, strategic purchases in local resources companies.

Greenmailer, shareholder activist, wunderkind with waxy hair – call him what you will – Nicholas Bolton's foray onto the stock exchange provided columnists around the country with entertainment, the other unitholders in Brisconnections short-lived hope, and underwriter Macquarie a bit of a fright.

Speaking of Macquarie, it was the year the very model of a modern major financial institution faded into oblivion, with a number of listed satellites departing the Macquarie mother-ship for differently leveraged galaxies. Macquarie bid farewell to the lucrative fee streams, and following a string of acquisitions, appears content with a model based more conventional investment banking activities.

Also worth noting was the stoush, more virtual than verbal, between Kerry Stokes and James Packer for ConsMedia, which resulted in Kerry Stokes' Seven Network winning two seats on the ConsMedia board. According to reports, they're now playing nicely.

And as the year comes to a close, activity in the banking sector is just heating up. On December 16, AXA SA and AMP sweetened their joint offer for AXA Asia Pacific Holdings, taking the value of the deal – where AXA SA would take control of AXA APH's Asian assets and AMP ownership of its local assets – to over $12 billion. But late last week NAB crashed AXA SA and AMP's party, making an eleventh hour bid to replace AMP as the buyer of AXA Asia Pacific's Australian assets. Left in a vulnerable position after NAB's move on AXA APH, AMP must now decide whether to walk away from its 'fifth pillar' aspirations, or enter into a very risky auction – all while speculation mounts that it may end up being the one that gets snapped up.

It was a year where, for many, fortunes were lost, but soon recovered. Now, who was thinking nothing much could trump the market action witnessed in 2008?