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Monday, 22 April 2019

Equity Capital Markets: Calmer seas ahead?

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A surfer watches the waves from Mirante point as heavy surf pounds a section of Arpoador beach in Rio de Janeiro

Source: Reuters/Sergio Moraes

A surfer watches the waves from Mirante point as heavy surf pounds a section of Arpoador beach in Rio de Janeiro

Just when investors thought it was safe to go back in the water, Asia’s equity markets have sent them running for the shore once more. The dramatic reversal in risk appetite that followed a US pledge to unwind an unprecedented monetary stimulus has knocked equity indices down by 10%–20% across Asia, putting paid to a host of IPOs across the region.

Periods of such volatility are nothing new in Asia’s emerging equity markets, but this particular episode arrived just as confidence had been building amid steady growth in Asian equity offerings. 

Plenty of companies were caught in the market at the wrong time, and many more have delayed their capital raisings as they wait out the storm. How long the turmoil lasts will decide whether those deals are cancelled altogether, or merely delayed.

It’s clear that Asia’s equity markets are not immune to global gyrations. They never have been: Asian wealth is growing, but the region’s emerging companies still need to access global capital to finance their expansion plans.

With the summer break looming large on the horizon, many Asian issuers may have to wait another few months for sentiment to recover enough to allow them another chance at tapping the capital markets. And the promise of reforms in China’s financial sector has thrown another spanner in the works for those hoping for a rebound in overseas listings from the world’s second-largest economy.

This report details the impressive tally of recent equity raisings in markets such as Thailand, Indonesia, Malaysia and Hong Kong, but new listings in all of those markets are currently on hold.

Private markets may offer some respite – both for cash-hungry companies and revenue-starved banks – and there are signs of life in derivatives-linked financings across the region.

If the recent return of volatility has shown Asia’s dependence on international capital flows, however, the reverse must also be true. Shifts in global sentiment can be enormously beneficial to Asian capital raisings.

Just as a worldwide bout of risk aversion has complicated efforts to bring deals to market in recent weeks, an end to near-zero interest rates in the US promises to drive more investors into equities.

Any signs of this reallocation have been buried in stormy markets, at least for the moment. But higher risk-free rates in the US – and, eventually, Europe – will force many fund managers to adjust their portfolios. Asia’s relatively high growth rates mean the region is still well-positioned to benefit.

To see the digital version of this report, please click here.

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