Exchange Insights from TSX and TSXV

Time for recovery

Real GDP has increased steadily, domestic demand is up, and so are corporate profits.

“In a sea of global political uncertainty,” says David Rosenberg, Chief Economist and Strategist with Gluskin Sheff in Toronto, “Canada stands out as a bastion of stability.”

Within this environment, companies raised 40% more money in the first quarter of 2012 than they did in the same period last year through financings on TSX. Although Initial Public Offerings (IPOs) were lower, and the number of new listings fell to 31 from 43 in the first quarter of 2011, the amount raised through secondary financings was up by 89%, and the amount raised through supplemental financings was up by 19%.

On TSXV, there were more new listings in the first quarter of 2012, with 55 companies listing for the first time, compared to 48 in 2011. But they raised less money – only $36 million through IPOs and $1.8 billion in total financings, compared to $99 million in IPO financings and $3.4 billion in total financings in the comparable period in 2011.

A number of factors weigh on a company’s decision to raise money on a public stock ex-change, and influence an investor’s decision to buy and sell a company’s publicly listed stock.

For companies, an economic recession may keep stock prices low, so issuing securities may not generate as much money as the company needs, or can raise elsewhere. Economic uncertainty also discourages investors from buying securities. As a report from the International Monetary Fund (IMF) observes, “Uncertainty about future exchange rates and GDP growth reduces flows into equities.”

Likewise, many small companies in Canada survived the recession by cutting expenses and accumulating cash. In a federal government survey in 2010, four out of five small businesses said they had no need to raise money. Now that economic conditions have improved, these companies can tap their own resources before they issue shares.

No one doubts that companies and investors alike will return to equity markets, continuing a worldwide trend that began in the mid-1990s. “Globally,” says the IMF in its Global Financial Stability Report, “an increase in the forecast GDP growth rate leads to an increase in equity investments. GDP growth is important for equity investors because higher GDP would lead to higher corporate earnings growth, making equities more attractive.”