The shrinking ASX

The Australian Securities Exchange (ASX) subtly reflects the ups and downs of Australian businesses. Stock prices fluctuate throughout the year. Good companies often rise, though nothing is guaranteed. Some investors make fortunes, while others lose everything. That’s the nature of the stock market. What about the ASX itself? Beyond being a marketplace for shares, it is also a business in its own right.

The ASX faces a major issue. While the companies on the exchange have grown over time, the number of listed companies on their exchange has been shrinking. At the end of 2024 there were just over two thousand companies to invest in. That may sound like a fair bit but it’s down one hundred companies in the last two years alone. That signals a worrying trend for Australia.

Looking at a ten-year trend, the numbers don’t look much better. In fact, the trend is concerning. Over the past decade, the number of companies listed on Australia’s major stock exchange has grown by just 25. The vast majority of which came between 2015 to 2018. Business confidence in Australia is at an all-time low, yet few seem to be paying attention to this growing problem.

Generally speaking, There are two main ways an economy can grow. The first is through population growth. The more people, the more production. The second is technological advancement. Imagine a farmer working eight hours a day with hand tools. Now picture that same farmer using a tractor. His productivity skyrockets. Technological advancements allow workers to produce more with the same effort. This is called an efficiency gain. These advancements typically come from business investment.

Since the mid-1990s, most Australian states have had birth rates below the replacement level (fewer than two children per couple).That leaves us with two main drivers of economic growth. Immigration and business investment. Yet, the ASX and its customer base is desperate for more listed companies. Entrepreneurship is more popular than ever. You’d expect a surge of young Australian businesses to invest in over the past decade, but that hasn’t happened

One reason could be that Australia’s property market has drained retail investor capital from the ASX. In Australia, it’s far more common to own an investment property than a stock portfolio. People dream of owning a second home, but few are eager to invest in stocks like Star Casino or Coles. Who can blame them? The tax benefits of property investment are hard to ignore. Decades of policies like negative gearing have made the ASX an afterthought for most everyday investors. That’s a big problem because parking hundreds of thousands of dollars in a suburban apartment doesn’t exactly drive productivity. From an innovation perspective, it’s not a great use of capital.

The property market isn’t the only factor to blame. The ASX has struggled to attract top companies, unlike its global competitors. Put simply, investors are choosing New York or London over Sydney. Investors prefer Tesla, Disney, Apple, and Amazon over Woolworths and Coles. This wasn’t always a problem. Twenty years ago, small investors had little access to overseas markets. Excessive paperwork and high minimum buy-ins were major barriers, keeping money in Australia instead of flowing to America. Times have changed. It isn’t 2005 anymore. The internet wasn’t a fad, it revolutionized finance. Today, Australians can invest in global stocks for less than a few hundred dollars with just a few clicks.

Back in 2008, if you wanted to invest in shares, the ASX was pretty much your only option. That is no longer the case. Today, investing in international shares takes just minutes using trading apps, with almost no hassle. The ASX’s response hasn’t been to list more companies. It hasn’t been to attract exciting Australian companies either. Instead of competing, they’ve listed fewer and fewer new companies. Not exactly a winning strategy.

Australia’s economy has stalled in innovation, with most wealth flowing into property instead. As a result, our economy has become a one-trick pony, relying heavily on mining for wealth. Beyond mining, we do little else to generate real economic growth. If mining were removed, Australia would drop significantly on key economic indicators. We would actually drop out of being a “developed nation” on some of those economic indicators. Rather than fostering innovation, we depend on immigration for economic growth. Mining is a finite resource, and it won’t sustain us forever.