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History is repeating itself: Zenith

As companies continue to seek liquidity during the COVID-19 pandemic through capital raisings, Zenith Investment Partners says this has provided investors the opportunity to access outsized returns.

Zenith said although there are definite similarities between the Australian equity market drawdowns and subsequent recoveries of COVID-19 and the Global Financial Crisis (GFC), COVID-19 has proven to be the GFC in fast-forward.

It said during this period we have seen the fastest bear market in Australian equity history.

As experienced during the GFC, the deterioration of the economy resulted in companies raising capital to shore up balance sheets.

In its latest sector report, Australian Shares - Large Companies, Zenith found that this time around, companies with growth ambitions also took the opportunity to tap the market for additional capital.

As a result, April 2020 was a record-breaking month, with 37 placements raising a total of $13 billion.

Jacob Smart, senior investment analyst at Zenith, said to see a similar spike in the number and size of capital raisings from placements within a single month, you would need to go back to October 2009, where the number of placements topped 20 and in November 2008 total funds raised hit a month high of $7 billion.

"On 1 April 2020, the ASX eased capital raising rules making it easier for companies to raise additional capital due to COVID-19," Smart said.

"With this temporary rule change, we saw companies such as Flight Centre and NAB, shore up balance sheets at a rate reminiscent of the GFC."

However, Smart said, it was not just companies in trouble that issued placements during this period.

"Some company behaviour we saw was somewhat opportunistic, with companies that were unaffected or less impacted by COVID-19 also raising capital," he said.

"Rather than fortifying their balance sheets, companies such as NextDC and Breville raised capital for growth initiatives such as acquisitions and investment."

Smart said there are similarities regarding the performance of investment styles and market dynamics during the two crises.

During the GFC, the growth investment style exhibited a stronger degree of capital protection in the drawdown, whilst the value investment style significantly outperformed in the subsequent recovery.

Although the full effects of COVID-19 are not yet known, Zenith said it appears as if history is repeating itself.

Read our full COVID-19 news coverage and analysis here.

Read more: COVID-19GFCZenith Investment PartnersJacob SmartASXGlobal Financial Crisis
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