Equity markets in Asia have taken a tentative step forward in recent weeks following a burst of successful issuance. But the prospect of a landmark deal that will reboot the market for the long term remains remote.
"Equity capital markets in Asia have performed well over the past couple of weeks as investors have turned their sights towards the east," says Jeff Zajkowski, head of Asia Pacific equity capital markets at JPMorgan.
The government handover in China and the conclusion of the US election have been positive for equity markets across the region. "Finally, investors and issuers have some certainty surrounding government policy, and as a result, investor appetite in Asia is picking up," says Zajkowski.
Chinese equipment maker Zhengzhou Coal Mining Machinery announced a $323 million H-share initial public offering in Hong Kong on November 21 in an attempt to go to market in Asia before the year-end.
China’s largest property insurer, the People’s Insurance Company of China, unveiled a $3.6 billion IPO out of Hong Kong to be priced on November 30. It will be the largest IPO in Hong Kong since 2010.
But reports suggest that the deal’s underwriters might have revised down the company’s valuation and IPO size, underlining how tricky the capital-raising environment remains.
Challenging times
"The IPO scene in southeast Asia has been active over the last month and the last year. But these remain challenging times," says Sam Kendall, head of ECM, Asia, at UBS. "Negative sentiment on economic growth prevails globally. We’ll need to see more than just one IPO trading up or down for the market to decisively open or close. The market is bigger than any single deal."
The average weekly volume of equity capital raised in Asia this year stands at $3.3 billion. But in the week beginning November 12, volumes were down to $1.5 billion. In the week before that, volumes were slightly better at $2.2 billion. "While equity capital markets are open, there is no doubt that volumes have dipped," says Kendall. "It’s been the same all year in that the debt market has been a little more open than equity."
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The $512 million equity offering by Fosun Pharmaceutical, another deal that was held up as a gauge of wider investor sentiment, failed to live up to its billing as shares in the company fell by nearly 12%, reflecting a lack of investor appetite in the deal. "Many of us over here were unhappy with Fosun’s IPO performance," says a Hong Kong-based banker. "It was a marketed deal, booked over time, yet it didn’t do too well in the re-sale."
Fosun’s performance is also related to the broader economic fundamentals of the region.
"Over the year and over the last couple of weeks, debt and equity from southeast Asia has been outperforming that in Hong Kong and China," says Zajkowski. "Malaysia, Indonesia and the Philippines, for instance, have seen volumes up by about 15% to 20% on last year. These southeast Asian countries are consumption-driven economies, so when demand from the west fell after the onset of the eurozone crisis and poor economic data out of the US, these economies remained relatively robust."
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| Sam Kendall, head of ECM, Asia, at UBS |
On November 8, the Philippines launched its third successful global peso note, priced at $750 million over 10 years, as part of a government effort to manage its external liabilities by reducing foreign exchange risk. The offering attracted 41% of demand from the US, 30% from Asia and 29% from Europe. But although the US election and the transition in China have had an overall positive effect on equity capital markets in Asia, the same cannot be said for debt, says Paul Au, head of debt syndicate, Asia, at UBS.
Election surge
"Over the last month, we have seen a surge of debt issuance out of China and Hong Kong in the investment-grade and high-yield market," he says. "But following the re-election of president Obama, attention shifted back to economic fundamentals away from politics in Asia and the rest of the world. As a result, we saw some investors become more cautious and adopt a risk-off mode."
The Chinese handover had little effect on the market as the result was more or less predetermined, says Au.
In relative terms, however, debt markets continue to remain robust and equity markets will remain volatile, says Farhan Faruqui, corporate and investment banking head for Asia at Citi. "There is a pulse back in equity, and we are telling issuers to be ready to take advantage of windows that can open and close in a matter of a few hours."
Merger activity is likely to remain equally uncertain. "M&A is constrained by macroeconomic activity, such as the ongoing eurozone debt crisis and the impending fiscal cliff in the US," says the Hong Kong-based banker. "As leadership changes in the world’s two largest economies have now been finalized, there might be some more certainty in the markets. We hope to see a resurgence of M&A activity next year."