# RDP 2019-04: A History of Australian Equities 1. Introduction

The equity market is one of Australia's largest and most high-profile financial markets. The total capitalisation of listed companies in Australia is nearly $2 trillion, and around$5 billion in shares are traded every day. Most large well-known companies in Australia, such as the major banks and resources companies, are listed; these account for a large part of Australian output and employ a significant number of people. And households are quite exposed to movements in share prices; if not directly, then through their superannuation, which is typically heavily invested in Australian equities.

Historical facts about the Australian equity market, however, can be difficult to identify with confidence, because coverage of Australian equities is quite mixed. This patchy coverage can, perhaps, be attributable to the relatively fragmented nature of the national stock exchanges until the 1980s. This paucity of data is in contrast to equity markets overseas. For example, Shiller (2000) observed that in the United States price-to-earnings ratios fluctuated around a constant mean for around 100 years before rapidly increasing from the 1980s. Facts of this nature have helped colour debates around such things as market valuations and rationality. However, this fact is impossible to verify for Australia as publicly available price-to-earnings data don't extend back beyond the 1970s or so. The same is true for other analytical series of the stock exchange, and even for price indices and dividend yields beyond the headline figures.

This paper seeks to address some of these gaps, focusing on share prices, company valuations and trading activity. It draws on a new unit record dataset constructed from historical stock exchange gazettes. This allows construction of new long-run analytical series on equity markets, such as on total returns and valuations. These new series begin in 1917 or 1937 (depending on the variable), and extend currently available series in some cases by over 50 years. I also draw on some existing sources to complement my analysis.

This paper proceeds as follows. First, I provide historical background on the relative size and importance of the equity market over the past century: although it is now a very large and important market, this has not always been the case. I then discuss the most important contribution of the new dataset: better estimates of historical returns on Australian stocks. These returns come from two things: capital gains (that is, changes in share prices), and dividends. I use the company-level dataset to discuss factors that have historically driven capital gains and dividends, and how these have varied across different types of stocks. The new data allow for better calculation of the dividend yield, which is revealed to be around 200 basis points lower than previous estimates. This implies a lower premium of equities relative to safe assets (the ‘equity risk premium’) as well.

After discussing returns, I detail several other important facts about the Australian equity market over time. The company-level data allow for a much richer picture of the industry composition of the market, and I show how the relative importance of resources companies and banks has varied, in part due to changes in the economic structure of the Australian economy. Finally, I discuss valuations of Australian equities with reference to ‘underlying’ factors such as profits and the book value of equity.

The series calculated here – and others – are presented in spreadsheet form in the attached data appendix.

## 1.1 Stock Exchange Gazettes

The primary, novel data source for this paper is the hand-collected unit record dataset constructed from share lists in Sydney Stock Exchange Official Gazettes (the Gazettes).[1] This is effectively comprised of two related datasets:

1. All companies listed on the Sydney Stock Exchange: shares outstanding and share prices from 1916–79, on an annual basis from the December edition of the Gazette each year.
2. The top 100 companies by market capitalisation (calculated from the annual data): shares outstanding, share prices and dividends from 1917, and profits and net tangible assets from 1937, on a quarterly basis until 1979.

I will refer to these data as the ‘RBA dataset’ throughout this article, reflecting their construction, but it should be noted that they are not ‘official’ Reserve Bank of Australia statistical series, and reflect the best efforts of the author only.

Also included is information about the industry of each company. Information about the nature of a given company's business was usually published in the Gazettes, although with varying degrees of precision. Around 60 per cent of listed companies' industries over the period the dataset covers were described as ‘miscellaneous’, and the Gazettes were not always consistent in applying naming conventions over time. Where possible, I have tried to indicate the industries using more modern conventions and consistent definitions. This has been supplemented with other sources, see Section 1.2 for further detail.

## 1.2 Other Sources

The most widely-used source of historical Australian stock market data are the series calculated in Lamberton (1958b), at the request of the Sydney Stock Exchange. Lamberton calculated a series of market capitalisation-weighted share price indices and a single dividend yield series. The share price indices are probably superior to those inferred from the RBA dataset, as Lamberton had access to better information about share issuance and was able to properly adjust for this.[2] But the dividend yield calculated from the RBA dataset is probably better, as discussed in this paper. The Sydney Stock Exchange continued to publish the indices using Lamberton's methodology for several decades following the original publication, which I use to extend the series and link up with current data.

The main source of modern data I use are equity market series calculated by Refinitiv Datastream. These overlap for a few years with the RBA dataset, so can be used to help externally validate it. They also allow extension of the figures until 2019, enabling us to put historical data in modern context, and vice versa. These include series for the entire market beginning in 1973, and for the ASX 100 beginning in 1987. I primarily use the longer series for comparison of ratios; since the top 100 companies make up the vast bulk of the total market capitalisation, series for the market are quite comparable to series for the top 100. However, when considering variables in levels (for example, in calculating the aggregate profits for the index), I use the ASX 100 series, in some instances spliced back with growth rates for the aggregate market to extend the series. For company-level data, I use Bloomberg data for the S&P/ASX 200. Finally, I use some series calculated in Foster (1996), which are freely available on the Reserve Bank of Australia website.

Qualitative information for some large companies was supplemented by Merrett and Ville (2016), while for others I have relied on sources found in the National Library of Australia, such as annual reports, to make as-accurate-as-possible assessments of industry groupings. Because the market capitalisation of the exchange is quite concentrated in large, well-known companies, we can be relatively sure that sectoral aggregates are correct, but industry descriptions of smaller companies may not be accurate, particularly if companies changed industries over time.

Further details about data harmonisation and the collection process can be found in Appendix A, as well as issues of coverage and reliability.

Other series are sourced as noted on the figures.

Table 1 presents a comparison of existing data series and the new series calculated in this paper.

Table 1: Equity Market Time Series Start Dates
Longest available from other sources(a) New series(b) Notes
Price index 1875
Lamberton (1958a, 1958b), extended with Sydney Stock Exchange Official Gazettes and modern sources
1917 Lamberton series is correctly adjusted for changes in the capital structure, although the RBA dataset allows the calculation of consistent sectoral indices
Dividend yield 1880
Lamberton (1958a, 1958b), extended with Sydney Stock Exchange Official Gazettes and modern sources
1917 Issues with Lamberton dividend yields discussed in Section 2.2
Dividend payout ratio 1973
Refinitiv Datastream
1937
Price-to-earnings ratio 1973
Refinitiv Datastream
1937
Aggregate market capitalisation 1949
Foster (1996)
1917 RBA dataset also allows estimation of sectoral shares using top 100 companies
Price-to-net tangible assets ratio 2000 1937 Price-to-book ratios (i.e. including intangibles) are available for MSCI indices to around 1980

Notes: (a) All efforts have been made to determine available data; it is possible other series have been calculated but not widely circulated or otherwise missed during this research (b) The new series all finish in 1979 and are of quarterly frequency, but can in most cases be extended with existing data to create a full time series to the present day

## Footnotes

Prior to 1987, individual stock exchanges existed in many different cities in Australia. In 1987 these merged to form the Australian Stock Exchange (now the Australian Securities Exchange, or the ASX). [1]

Further details on this can be found in Appendix A. [2]