“If they were raising at attractive prices and it repaired their balance sheets, it proved the best opportunity to buy into the banks.” Entitlement offers, which reserve equity for existing shareholders, provided a means of mitigating dilution. “As an existing shareholder, you only get diluted if you get under your previous position,” Taylor points out. While capital raisings brought some businesses back from the brink, other companies issued equity as a precaution against further market fallout or to assure investors they had a good chance of surviving the recession. Since most of this new capital was not put towards balance sheets, these companies are capable of making acquisitions or, if they are very confident, conducting share buy-backs to reduce shareholder bases and drive EPS higher. The big four banks and Boral are examples of companies flush with capital, Littler says. “The banks have all raised capital.

Now we’ve come out the other side, and the bad debts, unemployment and housing market are not as bad as we thought. Time will tell whether they buy-back or raise equity for more acquisitions.” Taylor says companies are feeling more confident and are considering ways to strengthen their businesses. “People are already talking about banks having too much capital. But the next phase will be more merger and acquisition-type activity.” Now that big companies have finished raising equity for recapitalisation, and the prospects of further issuances at discounted prices are slim, investor confidence has improved and managers are no longer keeping so much money on the sideline, Taylor says. But he predicts that mid and small cap companies will soon issue more equity now that the run of offers from big companies has finished. For quantitative managers, capital raisings are typically a negative signal because they dilute EPS.

But the severity of the crisis meant the recent series of raisings were received positively by the market, Don Hamson, managing director of Plato Investment Management, says. “In this do-or-die situation, most stocks have rallied after raising equity because there is relief they haven’t gone bankrupt.” However, despite the steep discounts, it will be some time before EPS nears undiluted levels. “Even if total earnings get back to the same level, it will be very hard for stocks to trade back at the levels that they were on,” Hamson says. Japan ’s dilution dilemma Ben Inker of GMO says the dilution of company earnings is a fundamental cause of the stagnation continuing to plague the Japanese equity market. In 1989, the Nikkei 225 nudged 40,000 points, generating a price/earnings ratio (P/E) of 62. But in the next 18 years, it fell 82 per cent to about 7000 points, and coughed up a P/E of just 8.6. “Short of revolution, Japan is the worst thing to have happened…How do you go 20 years without having any increase in valuation?” says Inker, GMO’s Boston-based chief investment officer.

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