An article from The Age way back which if investors read and...

An article from The Age way back which if investors read and understand might break this positive correlation that MESO and MSB are exhibiting.


Research from ABN Amro has shed a little more light on why trading in the three Australian and British dual-listed companies - BHP Billiton, Rio Tinto and Brambles - appears to defy efficient markets theory.
A few years ago, the Reserve Bank looked at DLCs to try to work out why the Australian and British share prices so frequently diverged, given that each of the companies in a DLC has an identical claim on future cash flows.
It was unable to come up with an unequivocal explanation as to why those divergences weren't arbitraged away, although clearly currency movements and differences in the liquidity in the two markets for each entity's stock are important.
The bulk of Rio's register, for instance, is in Britain, whereas BHP and Brambles were formed with a majority of Australian-registered investors. Liquidity tends to be self-perpetuating because it generates more efficient pricing.
The RBA study found that, while liquidity in both entities improved after each DLC was formed, liquidity in the dominant entity improved more. The other factor cited by the RBA as a possible part of the explanation was the difference in local market conditions and the different significance of the DLCs to the markets - Australian index-related investors have to have big positions in BHP and Brambles, whereas they would have a smaller weighting in British indices.
The ABN Amro research looks at those issues and others to try to understand why the British, or plc, listings of all three DLCs are trading at significant discounts to the Australian listings. BHP Billiton plc trades at a 7.8 per cent discount to its local listing, Rio Tinto plc at a 12 per cent discount and Brambles plc at a 10.5 per cent discount.
Incidentally, those discounts aren't consistent. Rio plc has traded at a premium to its Australian sibling for most of its post-DLC history. In other DLCs (Royal Dutch Shell and Unilever were the two longest-standing DLCs looked at by the RBA) the premium/discount has been as much as 30 per cent.
The average premium for the locally listed BHP scrip over its British counterpart over the past three years has been 4.9 per cent according to ABN Amro, with Rio experiencing a premium of 3.2 per cent over the past three years and Brambles a premium of 9 per cent. The biggest spread has been experienced by Brambles, where the premium has been as high as 16 per cent.
The most interesting is probably Rio, given that it traded, on average, at a discount in this market for the first seven years after the DLC was created in 1995. It probably isn't a coincidence, that over the past three years, the Australian sharemarket has dramatically out-performed the British market, with our market rising about a third over the period compared with a rise of about 8 per cent for the FTSE 100.
ABN Amro looked at a 200-day period for the DLC and found that the Australian market had risen 12.7 per cent over the period against a FTSE 100 increase of 8.5 per cent. It looked beyond the market aggregates, moreover, and found that our market was more expensive - it assigned higher prospective price-earnings multiples on average than the British market.
That flowed through to the individual stocks. BHP, for instance, sells on a multiple of 10.7 times prospective earnings here against 10.1 times in Britain; Brambles sells on a multiple of 22.6 times here against 18.8 times in Britain.
There are some possible explanations for those discrepancies, starting with the broader outlook for the individual economies and currencies and including issues like the weight of money flowing from our mandated superannuation system, our franking system (which makes dividends more attractive to Australian investors) and, for BHP and Rio, the fact that Australia is regarded as a resources-based economy and therefore is more a natural target for international investors looking for an exposure to the China-inspired resources boom as well as a currency kicker.
The reality that DLCs don't produce identical treatment for each set of shareholders might be regarded as an argument against them. They could be seen as producing unfair outcomes. What the RBA and ABN Amro analyses tend to point to, however, is that the explanations for the differential pricing relate more to the general home market economic and equity market conditions than they do to any eccentricity of the DLC structure.
They also suggest markets aren't as efficient as they should be. Investors ought to be shorting the Australian entities and buying the British paper and helping to close the differentials. ABN Amro, however, suggests it may be difficult to borrow foreign-owned stock in Rio and Brambles and therefore difficult to execute an arbitrage. The RBA noted there had been little migration between the registers in any of the DLCs.
Any arbitrage would also be disfigured by the impact that valuations of the different markets have on individual stocks. The DLCs can't be isolated from those differences, which seems to sum up the different stands of the explanation for why notionally identical securities have different values