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News and discussions from Novus Capital

Update Novus' Response to COVID-19

Gavan Farley - Friday, March 20, 2020


Further to earlier advice received, we wish to re-confirm that Novus’ position and response in relation to COVID-19 is aligned to those of the Department of Health, State Health Authorities and Department of Foreign Affairs and Trade (DFAT).

Novus is conducting ongoing and real time reviews to determine if additional measures are needed.

Novus business resilience and continuity

  • Novus’ Business Continuity Management System is implemented to the ISO 22301 standard.
  • Novus’ Business Resilience & Continuity framework aims to ensure:
    • the safety of our community and clients
    • the continued provision of key client services and operations.


  • Novus has created a COVID-19 Response Team to continually monitor, review and manage our response to the evolving situation. Ongoing reviews include managing the current and potential impacts on our working community, office locations, operations and client services.
  • Our Business Continuity Plans are for all locations across Australia including all core systems that supports Novus’ capability to recover business operations in the event of any significant disruption to our core systems.
  • Novus has already tested out the work from home capabilities and remote office locations on varying days, with varying staff and we confirm that all IT requirements have been updated and infrastructure improved to ensure that no disruptions have occurred. We confirm all testing to be complete.


As per the latest announcement from Prime Minister Morrison, anybody who arrived in Australia from midnight 15 March 2020 is required to self-isolate for 14 days.

You must work from home for 14 days and seek medical clearance before returning to the office if:

  • You have had close contact with someone who has or is suspected of having COVID-19; and
  • You have symptoms of COVID-19 (a cough, high temperature, shortness of breath).

For the safety of our community, you must also stay away from the office if you have any flu-like symptoms or are feeling unwell.

Please contact either Wayne Gooley, Sara Harman or myself, if you or your family require any assistance.

Client Meeting and events

  • All internal and external firm events will be limited to a maximum of 20 persons. These events are only to go ahead if they are necessary and you will be required to obtain written Management approval prior.
  • Our advice to all Advisors is that all client meetings that were to occur face to face are changed to a teleconference method and that all clients do not attend Novus’ offices for the safety of our community and the health of our clients. Further we would encourage all Advisors to refrain from visiting clients, and instead, offer a teleconference discussion.


  • All international travel has been cancelled with immediate effect.
  • Only essential domestic travel is allowed and it is completely voluntary.

As part of our working culture, we embrace flexibility and we are confident that these changes will not impact or disrupt services. We are working closely with our third-party platform providers to ensure the service levels are continued to be met despite the disruptions to their business operations as well.

We are confident that we have the appropriate processes and measures in place and will continue to monitor the situation.

If you have any questions in relation to Novus’ response to COVID-19, please contact Zainab Adams-Kathrade, Head of Legal & Compliance, Novus Capital Limited on 0426 173 116 or via email Zainab.Adams-Kathrada@novuscapital.com.au.

IPO Watch Australia

Gavan Farley - Wednesday, February 05, 2020

A Review of Australia's 2019 IPO Activity


ASX Tech Index to Drive Listings as IPOs Slow

Gavan Farley - Monday, December 23, 2019


ASX Tech Index to Drive Listings as IPOs Slow

The creation of a new index to track and invest in the fast growing technology stocks on the Australian Securities Exchange will help boost the number of tech IPOs locally in 2020, experts say, as new figures show the number and value of ASX listings fell in 2019.

On Monday, the ASX revealed plans to create a Nasdaq-style S&P/ASX All Technology index from February, and executive general manager of listings and issuer services, Max Cunningham, said it would push new companies to a pipeline of listings next year, which already looked like outstripping 2019.

Despite the number of IPOs being down on 2018 both locally and globally, tech stocks represented the highest number of new listings on the ASX. In total, 90 new stocks are expected to have listed by the end of 2019.

"This is always caveated with volatility in markets, but we've probably never had a better [tech] pipeline,'' Mr Cunningham said. "Next year looks big in terms of size, and also the number of tech companies, which has been coming in at around 12 to 15 each year ... we may have a few more next year."

Figures compiled by the ASX show the local IPO market was down 21 per cent in terms of capital raised in 2019, from $8.5 billion to $6.7 billion as at December 12. Dealogic data, meanwhile, showed that the global IPO market was down 12 per cent year-on-year.

While the ASX's push is still small in comparison with the Nasdaq's dominance of global tech listings, Mr Cunningham said US exchanges had been heavily focused on tech for 30 years, in comparison to five years at the ASX.

He said Australian tech stocks were more heavily weighted towards business-to-business companies such as WiseTech and Xero than the US boards, where big consumer brand names including Facebook and Apple were traded, but there was huge potential for it to grow along with the local tech sector.

"I think the important distinction is we are bringing companies to market earlier than US IPOs, which means earlier access to institutional investors and bringing more diversity to investors," Mr Cunningham said.

"Tech is 20 per cent of the S&P 500, whereas IT currently makes up just 6 per cent of the ASX 200 index by number of companies, and only 2.5 per cent by market cap."

Reaction to the announcement of the new tech stock index was largely positive, but analysts were divided about its potential to drive a larger locally listed tech sector.

Mark Bryan, the head of research at Wilsons, said it was a strategically sound initiative that would raise visibility in the domestic sector while providing investors with more options.

"Over the last decade we have experienced an infusion of high quality tech plays on to the ASX,'' he said. "Any initiatives to further raise visibility and cement the ASX as a leading global exchange for small- to mid-cap technology names is a positive."

Mr Bryan said companies included on the index could experience a "network effect", and benefit from being classified alongside well-established tech companies such as Xero, Bravura and TechnologyOne.

However, senior technology equities analyst at Morningstar, Gareth James, said he doubted an index would overcome Australia's disadvantage of being so far away from large investor bases in the US and Europe.

Big challenge

"Considering the size and composition of Australia’s economy and population, it’s unlikely that Australia will ever be a material source of technology companies from a global perspective," he said.

"For most overseas companies, there's little logic in listing in such a remote region unless they are so small and so early stage that they are unable to list elsewhere in the world.

"However, this creates the issue for the ASX that they risk attracting small and high-risk companies, which kind of defeats the logic of what they are trying to achieve."

Hugh Bickerstaff, the global chief investment officer at angel investor group Investible, was more positive about the long-term potential of the local tech industry.

He said the new tech index represented a natural progression in the ecosystem and was recognition of the increasing strength and maturity of local entrepreneurs and investors.

It would allow Australian tech founders to access larger pools of capital earlier and from a much broader investor base.

"Retail investors will also be able to access and support Australian tech companies in a more liquid fashion," Mr Bickerstaff said.

"This will encourage early stage investors to support Australian tech startups, as there will potentially be a new pathway to liquidity in early stage investing. And these events will be able to occur earlier due to the lower thresholds."

The general manager of industry group FinTech Australia, Rebecca Schot-Guppy, said the AllTech Index represented a good first step towards highlighting the success of listed technology companies in Australia to the broader investment community.

"Work will have to go into promoting this index, as the market by default will still focus on the ASX 100 and its top 20 companies. Hopefully, the performance of its companies will turn heads," she said.

"Over time, it would be interesting to see this index narrowed even further into categories of technology, like fintech. Technology is ubiquitous and leveraged in every new company, so even the phrase ‘technology company’ could become redundant over the next decade."

Co-founder of video technology startup Shootsta, Tim Moylan, said going public remained a complex process for emerging companies, but he believed the profile and credibility offered to companies able to make the ASX's new index would encourage some to investigate their options.

"It’s a badge of honour and credibility to be part of the ASX 100, so if the ASX creates a similar but smaller list for top technology companies on this index and promotes it, then it could encourage more technology companies to list locally instead of overseas," he said.

"It could also encourage them to dual-list and get exposure to a larger market, but also the benefit of being able to promote their top position on the ASX."

Source: Finanical Review


New edition of ASX Corporate Governance Council’s Principles and Recommendations Released

Gavan Farley - Thursday, April 04, 2019


On 27 February 2019, the ASX Corporate Governance Council (Council) released the fourth edition of the ASX Corporate Governance Principles and Recommendations (Recommendations). The Recommendations apply to all entities listed on the ASX, but are also useful for non-listed companies that are looking to implement best practices.

The updated Recommendations will take effect on 1 January 2020 for entities with a 31 December balance date, and on 1 July 2020 for entities with a 30 June balance date. Entities are encouraged to adopt these Recommendations earlier if possible.

What has changed?

The key changes to the Recommendations revolve around the culture and values of entities in the context of community trust and confidence. The Council ‘considers it imperative’ that listed entities align their culture and values with community expectations in light of a number of examples of listed entities falling short.

The wording in the Recommendations has been changed to state that an entity must ‘instil’ and ‘continually reinforce’ the culture of the organisation, suggesting that there is an ongoing positive obligation on the Board to maintain the appropriate cultural standards and oversee its progress. The new Recommendations contain 35 recommendations as compared to the 29 recommendations in the 3rd edition of the ASX Corporate Governance Principles and Recommendations.

Out of thirty-five Recommendations, the following are entirely new recommendations for listed entities:

  • Recommendations 3.1 – to articulate and disclose its values to the public;
  • Recommendation 3.3 – to establish maintain and disclose a whistle-blower policy and ensure that the board (or a committee of the board) is informed of any material incidents reported;
  • Recommendation 3.4 – establish and disclose an anti-bribery and corruption policy, and ensure that the board or a committee of the board is informed of any breaches;
  • Recommendation 4.3 – to disclose its process to verify the integrity of any periodic corporate report that it releases to the market that is not audited or reviewed by an external auditor. This raises the bar for corporate reporting best practices;
  • Recommendation 5.2 – ensure that its board receives copies of all material market announcements promptly after they are made;
  • Recommendation 5.3 – a listed entity that gives a new substantive investor or analyst presentation should release a copy of the presentation materials on the ASX Market Announcements Platform prior to the presentation in order to ensure equality of information among investors;
  • Recommendation 6.4 – ensure that all substantive resolutions at a meeting of security holders are decided by a poll, rather than by a show of hands, as a show of hands is thought to be inaccurate; and

The following four Recommendations have been updated and elaborated:

  • Recommendation 1.5 –disclose the full text of its diversity policy and disclose measureable objectives set for a reporting period to achieve gender diversity. The suggested objective is no less than 30% of each gender for directors. Previously, the Recommendations suggested that entities only disclose a summary of their diversity policy;
  • Recommendation 2.2 – it is suggested that a board should now disclose and regularly review its skills matrix to help the board identify any gaps in collective skills of the entity that need to be addressed. This will also assist with succession planning for management; and
  • Recommendation 2.6 – it is recommended that a listed entity should have a program for inducting new directors. There should also be a program for periodically reviewing if there is a need for existing directors to undertake professional development, legal training on framework and duties as a director, as well as induction training.
  • Recommendation 8.1 – in addition to the board of a listed entity being required to have a remuneration committee with at least three members, a majority of whom are independent directors, a listed entity included in the S&P/ASX 300 Index is now required under Listing Rule 12.8 to have a remuneration committee comprised solely of non-executive directors for the entire duration of that financial year.

There are also new Recommendations which are perhaps more uniquely relevant to some listed entities:

  • Recommendation 9.1 – if a director of a listed entity does not speak the language that board meetings are held in, the entity should disclose the process it has in place to ensure the director understands and contributes to discussions at board meetings (such as providing translation copies of material documents to be tabled). This is to assist the director to discharge his/her directors’ duties; and
  • Recommendation 9.2 – if a listed entity is established outside Australia, it should ensure that meetings of securityholders are held at a reasonable place and time;
  • Recommendation 9.3 – if a listed entity is established outside Australia has an AGM, or where an externally managed listed entity has an AGM, the entity should ensure that its external auditor attends its AGM and is available to answer questions from securityholders relevant to the audit.

What remains the same?

The new Recommendations maintains the same flexible non-mandatory ‘if not, why not’ approach to disclosure, whereby a Board is entitled to not adopt a principle, but must explain why it has not adopted the recommended approach.

The new Recommendations have the same structure of eight core principles and accompanying supporting recommendations. The eight core principles are as follows:

  1. Lay solid foundations for management and oversight: A listed entity should clearly delineate the respective roles and responsibilities of its board and management and regularly review their performance.
  2. Structure the board to be effective and add value: The board of a listed entity should be of an appropriate size and collectively have the skills, commitment and knowledge of the entity and the industry in which it operates, to enable it to discharge its duties effectively and to add value.
  3. Instil a culture of acting lawfully, ethically and responsibly: A listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly.
  4. Safeguard the integrity of corporate reports: A listed entity should have appropriate processes to verify the integrity of its corporate reports.
  5. Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities.
  6. Respect the rights of security holders: A listed entity should provide its security holders with appropriate information and facilities to allow them to exercise their rights as owners effectively.
  7. Recognise and manage risk: A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework.
  8. Remunerate fairly and responsibly: A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders and with the entity’s values and risk appetite.

How does this affect you?

You should consider the latest Recommendations in detail and update your policies where necessary to comply with the new Recommendations.

If you are a listed entity with a full financial year commencing on or after 1 January 2020, you are required to report against these new Recommendations from 1 January 2020.

If you are a listed entity with a full financial year commencing on or after 30 June 2019, you are required to report against these new Recommendations from 1 July 2020.



Australian IPO Report 2018 - HLB Mann Judd

Gavan Farley - Wednesday, February 20, 2019

Total funds raised in initial public offerings (IPOs) in 2018 hit $8.44 billion, up 106 per cent on the 2017 total of $4.09 billion, although the pipeline into 2019 reflects a softening of the market, according to the latest HLB Mann Judd IPO Watch report.

“Despite the increase in funds raised, there were only 93 initial public offering (IPO) listings on the ASX in 2018, down from the 110 new market entrants in the previous year, but in line with the five year average,” said Marcus Ohm, author of the report and partner at HLB Mann Judd Perth.

“Unusually, for recent years, there were a number of $1 billion+ cap companies listing during the year.

“The three largest IPOs of the year (Viva Energy Group, Coronado Global Resources Inc. and L1 Long Short Fund Limited) raised $4.75 billion between them – 64 per cent of the total funds raised.

“As well as being one of the few growth sectors for the year, the Materials sector recorded the most listings – with 35 listings representing 38 per cent of all IPOs undertaken – compared to 29 listings in 2017.”

Continuing the trend of the past few years, small cap companies – those with a market capitalisation of less than $100 million – continued to make up the bulk of new entrants to the IPO market, Mr Ohm said.

“There were 72 small cap IPOs undertaken during the year, down on the 88 of the previous year, but nevertheless representing 77 per cent of the total IPO market.

“The total also remains well above the previous five year average of 50 listings.”

Mr Ohm said some companies had difficulties raising capital during the year, and this is reflected in the total number of IPOs that did not meet their capital raising goals.

“Only 72 per cent of all new listings were able to meet their target, which was down on both the 2017 and 2016 years which saw 79 per cent and 83 per cent of targets met respectively.”

Mr Ohm added, on average, IPOs in 2018 experienced an underwhelming share price performance subsequent to listing.

“New markets entrants recorded an average first day share price gain of 5 per cent, but only 47 listings ended their first day above their listing price – a rather poor result given that the issue price of these IPOs was typically discounted.

“Year end gains were disappointing too, as on average, new IPOs for the year decreased in share price by 18 per cent by year end. This is a worse performance than other market indicators, with the ASX 200 recording a decrease of 7 per cent for the calendar year.”

The year end losses made by a significant number of IPOs in 2018 and general market conditions suggest that there is likely to be a reduction in IPO activity in the coming six months, Mr Ohm said.

“Unsurprisingly only 17 companies had applied to list on the ASX at the end of 2018, well down on the 37 that had applied at the same time in the previous year.

“The companies that have applied are hoping to raise $179 million, which is a 70 per cent reduction on the $603 million sought at the end of 2017.

“Materials stocks made up the majority of the proposed listings with seven listings, showing market sentiment still remains for this sector.

“Overall the pipeline appears to be soft and reflects the performance of IPOs and the wider market. This was evidenced in the final quarter of 2018 with sentiment perhaps being an important factor.

“Companies considering listing will need to clearly articulate their offerings and provide sound investor communication.”

HLB Mann Judd is an Australasian association of independent accounting firms and business and financial advisers, with offices in Australia, New Zealand and Fiji.

* Emerging, or small cap, companies are defined in this report as those with a market capitalisation of $100 million or less. All data excludes property trusts.

2018 - Half Year IPO Report

Gavan Farley - Wednesday, August 29, 2018

Deloitte Half Year 2018 IPO Report

IPOs struggle to make first half mark as second half looks brighter

Australian IPOs delivered a muted performance in the first half of 2018, with more losers than winners, but positive global performance, a record year for US markets and strong local economic fundamentals, provide a real sense of optimism going into the second half.

Key Points from Deloitte's latests IPO update covering the half year yo 30 June 2018 include:

  • 40 companies successfully listed, raising $1.8 billion, compared to 57 listings in the same period in 2017
  • 16 (40%) experienced negative returns, with weighted average performance of -1.5%
  • Financial services was the dominant sector, accounting for 89% of the capital raised - however listed investment funds represented a significant proportion of the raising
  • Only 10 (25%) of the listings raised capital in excess of $75M
For more on this topic  go  to  Deloitte's  Australian website

2016 IPO Report - Good year for for Smaller Companies

Gavan Farley - Friday, March 17, 2017


2016 IPO Report: Good Things Come In Small Packages

2016 was a strong year for Australian companies floating on ASX. The number of IPOs rose to 96 (from 85 in 2015), implying an average of eight per month or two a week – certainly enough to keep the most active investors busy... Though the absolute number of new floats increased, the market capitalisation at listing of these new ASX entrants was lower in 2016 than the prior year. Signalling a return to the smaller end of the market and, in the fourth quarter, a degree of ‘deal fatigue’ on the part of investors as many of the larger floats planned for this traditionally busiest quarter of the year were pushed into 2017.

On performance, investors had little reason to complain on average: IPOs outperformed the ASX200 index by 18% and returned an average of 25% at year end. And more so because the best performance was seen at the smaller end of the market. New floats that issued less than $50 million outperformed those that issued more than $50 million by 17.5% at year end, an encouraging statistic for investors taking a portfolio approach to IPO investing.

First day returns were also impressive and increased by 5% on the prior year, indicating either strong aftermarket support and a good investor following, or a strategy to leave some room for a price rise in the way new issues have been priced.


Screen Shot 2017-02-15 at 8.52.36 AM.png


Living in a VUCA World

Gavan Farley - Wednesday, November 23, 2016

Living in a VUCA World

Today I was fortunate enough to be invited by a good friend and associate at Cube Capital Hani Iskander to attend a quick briefing by the owner of Williams Inference, John Trudgian. Williams Inference, a business intelligence service, was started 1965 in the USA by James Williams and is based around the idea that by observing human behaviour, looking for anomalies, one could spot trends early and take advantage of them to build into your investment strategies. The service is subscribed to mainly by major fund managers, and they get a quarterly presentation from John or one of the team, which distils collates and interprets information from over 200 publications, financial markets, books film TV and the web.

A world wind one hour ride

John took us on a ample ride through his most recent quarterly report. We only had an hour… (it normally takes two or three) The theme of this report, which was written before Trumps upset victory is summarised in the following quote…:

“We are moving from a world of problems, which demand speed, analysis and elimination of uncertainty, to a world of dilemmas, which demand patience, sense making and engagement with uncertainty” – living in a VUCA world

Birds are Singing Earlier

We started with…. Noise and a story about how naturalist are observing how birds are beginning their dawn chorus some two hours before sunrise. The reason given is that we humans are making so much noise, that the birds have to start earlier and earlier, in order to be heard… this story lead onto developments in technology designed to bring back some peace and quiet. Noise cancelling head phones, especially amongst professionals such as pilots is a big and developing market…

Talking not Typing

the noise theme then morphed into new ways to interface between our ever-present device, and the problems of using Siri, Cortana and other voice user interfaces in our devices. It turns out that the main reason that these devices don’t work as well as they should is due to background noise. Aftercall we can speak on average 150 words a minute but type at less than 40 wpm. This lead to an article about a firm called Kopin that has a completely new approach and can achieve accuracies over 90% in standard environments… Kopin predicts that this breakthrough will mean that by 2020 50% of queries will be voice generated.

Augmented Workforce

From Voice and smartphones, we made a small leap to augmented reality and its use, not in gaming but in industry, healthcare, training for high risk jobs, and inevitably … to how the porn industry is adopting to this new technology….

No Sex in Japan

From there we were lead across the se to Japan where changes in demography and family structure such that 70% of Japanese under 34 are single and 40% are still virgins, and just across from Japan, China is experiencing significant declines in marriage rates and increasing divorce rates. India the same. So what, you might say; these things have been happening in the west for decades, but that’s the point, what has taken two or three generations to happen in the west, is happening in these counties within one generation. What concerns, opportunities can be inferred by these trends….

The Device Man

And now our next stop on this whirlwind tour was around the theme of device people… our addiction to phones and online communication and how it is changing how humans interact. I commented to the group on how some people check the current weather on their phone, while sitting next to a window. People sit at the same table, texting each other…

Serial Dating – Serial jobs

this led to dating sites, the gig economy, the lack of security, permanence, planning for the future, even how the use of cosmetics has spiked as people (men and women) put on makeup, not to look better in person, but to make them look better in photos, selfies. Did you know that campus bookstores in the USA now have large cosmetic sections., which then led to a story on how Deutsche Bank is now using technology for matching people on dating sites to match new recruits. our hour was almost up… and we looked at the gender gap in the work force particularly in the upper echelons, and why it is so persistent… but no time to pause and we had to move on… we touched on money, dynamic pricing, such as Ubers surge, Amazons variable pricing, and the feedback loop to earlier mentioned trends of piece meal work,, the zero hour on-call work contract, instant and serial dating…

The VUCA World

and finally at the 55th minute… we arrive at the VUCA world. VUCA.. purportedly a US military acronym… coined at the end of the cold war, standing for Volatile, Uncertain, Complex and Ambiguous.

Thus our journey ended, but it was an amazing trip that generated so many ideas m of how things connect, or not. The skill in investment management is to try to take a view of what all these things going on around us might mean. We are often so busy, just doing our daily routines, living in our bubble, we can’t get out. We should do it more. You can get more info on John @ http://competitiveintelligence.ning.com/profile/JohnTrudgian. The web site http://www.williamsinference.com/ is undergoing a re-vamp but there is some great archival material there


Snap Inc IPO

Gavan Farley - Friday, November 18, 2016

It is hard to see how Snapchat parent Snap will live up to expectations after its IPO

David Glance, University of Western Australia

Snap, the parent company of Snapchat is looking to go public with an IPO in March of 2017. Snap has filed its intentions secretly with the US Securities and Exchange Commission (SEC) and it is expected to be valued at between US $20 and $25 billion. Snap’s current earnings are not publicly disclosed but because its filing with the SEC was private, they are thought to be less than US $1 billion per year.

There was a time when the public’s enthusiasm for social media companies was such that Snap’s valuation would never have been questioned. When Twitter listed on the stock market, it was valued at US $25 billion, a price only made believable by the optimistic view that Twitter would eventually find a business model that would drive phenomenal growth. It didn’t do that of course, and 3 years later, its value is 50% of that initial value, it is laying off staff and it recently couldn’t persuade anyone that it was worth buying. Twitter is now a company with few prospects and facing enormous challenges to put in place meaningful ways of generating revenue.

Given how hard it is to find ways to make money from social media outside of advertising, it is not clear how Snap intends to make the sort of money that would justify its very high valuation. Facebook has succeeded so far with advertising because the platform is ideally suited to finding out a great deal of information about users that can then be used to deliver targeted ads in multiple formats. But even Facebook is starting to find that there is a limit to how many ads they can load onto someone’s news feed.

Twitter and Snapchat are at an immediate disadvantage as advertising platforms because they have far less capacity to find out meaningful information about their users but also far fewer options of how to present them ads. Both Snapchat and Twitter are hoping that they can transform themselves into media companies and get their users to consume video from companies through their platform. However, in the media space, they are up against much better competitors like Google, Facebook, Amazon and even Apple.

Snap has recently branched out into hardware with the launch of Spectacles, sunglasses that are fitted with a camera that can take short videos to store and publish through Snapchat. Although Snap’s Spectacles are certainly less geeky than Google’s Glass glasses, they may suffer from the same social stigma that ended Google Glass as a consumer product. It is also not clear why people would want to wear glasses with camera on the off chance that there was something worth filming for 10 seconds. Even if “Specs” is a successful product, it still would only generate a tiny fraction of the revenues that Snap will have to make to justify its price.

The other challenge Snapchat faces is in its core functionality and the battle for users’ time. Snapchat’s features have been largely duplicated by Facebook’s Instagram. Instagram also has twice the number of daily active users than Snapchat.

The difference between the two services is in the type of communication that each allows, Snapchat’s original focus was on disapearing messages that could be used for “sexting”. Although this has become a smaller part of the reasons why people use Snapchat, the ephemeral nature of Snapchat messages is really about humorous, but essentially trivial, types of communication.

Other apps like Facebook Messenger and WhatsApp also now allow secure and private communication making Snapchat less unique.

Unlike Snapchat, Instagram tends to encourage photos that are more considered, encouraging a broader range of quality and communication. This is mostly because the photos are enduring and intended for larger audiences. At the end of the day, a social network is where your friends are and all of them are likely to be on Facebook, far less likely to be on Snapchat.

There is an overwhelming sense that Snap is trying to raise money for its service now, because it can. Seeing Twitter’s struggles must be a sharp reminder that staying relevant as a social media platform is not a given, despite early success. Snap will also find that being public and having its performance constantly scrutinised is going to be extremely tough going.

For shareholders and investors, IPOs are known as an “exit strategy”, a way of realising the gains on your investment or unlocking the value of your shares as one of the founders or employees. An exit strategy may be appropriate in the case of Snap given that it will be incredibly hard to maintain revenue growth when your principle audience is extremely young and fickle.

The Conversation

David Glance, Director of UWA Centre for Software Practice, University of Western Australia

This article was originally published on The Conversation. Read the original article.


Why Stock Market Panic can Signal a good time to Buy

Gavan Farley - Tuesday, November 01, 2016

Explainer: why stock market panic can signal a good time to buy

Lee Smales, Curtin University

Financial markets around the world are responding to current political uncertainty in both Australia and the UK by sending stocks, bonds and currencies on a rollercoaster ride.

The far-reaching implications of Brexit caused the S&P/ASX 200 volatility index (A-VIX) to spike to the highest level since the start of 2016. Similarly, the A-VIX jumped 5% in the opening minutes of trading on Monday after it became clear the federal election would remain unresolved.

Investor sentiment (A-VIX) responding to political uncertainty.

The VIX essentially gives an indication as to the market expectation of price volatility over the next 30 days. Since the main participants in the option market tend to be investors seeking protection against declining prices, the VIX tends to rise when investors are anxious about falling markets – giving rise to the colloquial term of the “fear gauge”.

Why investor sentiment is important

In theory, asset values should be determined by competition among rational investors. Such competition makes for prices that reflect “fundamental” values - basically the discounted value of expected cash flows. But in reality we know this is not always the case. For instance, based on the discounted value of rental income, the Australian housing market is currently far above fundamental value. Essentially, “sentiment” reflects the irrational behaviour that pushes prices away from the underlying fundamentals.

The uninformed traders who exhibit this irrationality are often called “noise” traders, and theory suggests that over time they will lose sufficient capital to be forced out of the market. The trouble is, constraints can mean that even the most informed trader could become insolvent before the market reflects fundamental values. With this in mind, it is important to understand what sentiment is, how we can measure it, and how it might impact asset prices.

The theory on investor sentiment suggests that positive sentiment will drive prices above fundamental value and provide above average returns in one period. In the next period, the misvaluation will be corrected. So periods of positive sentiment are followed by periods of below average returns, and vice-versa. That is the theory, but how can we empirically test it?

A self-fulfilling prophecy

A major issue that we have is that sentiment cannot be directly observed, and so we have to use alternate measures as a proxy. A number of alternatives have been suggested, these are often based on surveys (such as consumer confidence) or market variables (such as trading positions) with varying degrees of success in explaining market movements.

A further complication in researching the effect of sentiment is that it is often difficult to disentangle sentiment from market movements as they are often self-reinforcing. To think of why this may be, consider media reporting of movements in the stock market. If the stock market goes up, then the media writes glowing reports and this entices additional “noise” traders into the market. More shares are bought, pushing prices higher, and producing further positive media commentary. This can often continue until we are in bubble territory.

Two important proxies for investor sentiment

Aside from volatility indices like the VIX, there is also a composite index that uses the principal components of six individual proxies related to market activity (this includes share turnover and the number of IPOs).

The researchers that developed this index used it to explain stock returns over a lengthy period running from 1963. They found that investor sentiment had a greater effect on stocks in small, young, and high-growth firms. The index data is available here, but ends in 2010.

Relationship between Baker Wurgler sentiment index and stock market returns.

What the research says about sentiment and returns

Research has shown that VIX and stock prices have a strong contemporaneous relationship, where VIX increases as stock prices fall. Perhaps more importantly, VIX is also useful in forecasting price movements in future periods.

When investor fear is high, stock prices are pushed below fundamental values. In the next period, when the level of risk aversion reverts to some norm, stock prices move back towards the equilibrium level and generate above average returns. This fits well with the underlying theory of investor sentiment.

Relationship between investor fear and stock market returns. Data sourced from DataStream

Interestingly, investor fear in the stock market is also informative for returns in currency markets and bond markets, suggesting that the effect of sentiment is pervasive across asset classes. And sentiment also effects the way in which markets respond to news events, such as economic data releases, with stronger, more volatile responses tending to occur when investor sentiment is low (alternatively, fear is high).

Political uncertainty can drive sentiment

Right now many investors are unsure about how government policy will impact them directly, via taxation and superannuation reform, and indirectly through the effect of policy (or lack of policy) on business investment decisions.

For many investors, this remains a time to be cautious. However, history has shown that the best returns are often to be found by buying when investor fear is at its highest.

The Conversation

Lee Smales, Senior Lecturer, Finance, Curtin University

This article was originally published on The Conversation. Read the original article.