Are you bullish on the prospects for Asian DRs this year?
Nanavati: It's very hard to find years where markets as a whole run up 70% to 80% back to back. Individual stocks might, but markets tend not to. But even if the returns were half that it would be a very positive market. But a lot of people think this year's market will not be as buoyant as last year. A lot of deals are currently predicated on buoyant markets, so you could have a scenario where many of the deals being talked about - particularly in China - may not happen, simply because of optimistic valuation assumptions.
If you are pricing stocks on the assumption of the market going up 80% that is a problem and you'll be disappointed. That's the only cloud on the horizon - some issuers may not issue because they don't get today's very buoyant valuations.
Based on the pipeline you see, do you think this could be a record year for DR issuance from Asia?
For DR issuance, yes. Last year was a decent year, and dominated by Asia. This year, we'll see the domination of China and India - which were not necessarily that active in the depositary receipt front last year. If every other Asian market stays the same in terms of issance, it will be a record year. Taiwan should remain strong.
Plus there were a couple of deals that were held back last year. For example, some of the delayed Korean deals will revive this year.
So we should have a significantly better year than last year.
There are some rather grand estimates for issuance from Asia this year. How much of that will be DRs?
That's hard to say. Companies first choose to raise a certain amount of money. Then are they going to list at all in the US or Europe? I would say for the large issuances, eight out of 10 deals are probably going to choose to list in the US, or London or Luxembourg. How much actually gets placed into that facility is very much a function of timing, and allocation strategies of underwriters. So it is very hard to say how much of the stock will go to instruments themselves. But if it just follows normal patterns we'll have a record year - just extrapolating averages of how much of a particular deal is placed in ADR form.
Are you seeing more interest from US clients in buying Asia these days?
There's definitely a big shift in the US to buying international markets. The Federal Reserve publishes flow information which shows that a lot of money flowing out of the US.
A total of $81 billion of new money flowed out versus $17 billion the previous year. This is for non-US equities, but obviously Asia gets its fair share.
Is that partly driven by the weakening US dollar?
I am sure that is part of it. But my general sense is that initially it was the valuations that were compelling. The currency added a kicker.
One of key changes that has been spoken about are changes to the composition of the MSCI index, with Korea and Taiwan moved to developed market status. What's your sense of how that will impact the markets?
Let's take Korea first, as it seems to be the more likely move - from emerging to developed. Some people argue that there is more money invested in the developed index and just by that shift, you'll have more money coming into Korea, than leaving for emerging markets. That would indicate upward pressure on prices.
There are obviously MSCI-deviant managers who may, however, already have invested ahead of the move to catch the upside. People might be buying on the news.
But one of the more important things we feel from a client perspective is what it means from an investor relations viewpoint. You are used to dealing with regional fund managers or emerging market investors, and now you might have to deal with the same family - such as Fidelity - but fund managers who are used to dealing with the developed world. They are used interacting differently and particularly in the arena of investor relations you are competing with US and European companies for the same capital and the same attention. Asian companies could generally do a lot more in the arena of investor relations and this may create a need to change. So we are talking to clients about investor relations, best practices and have internally investor relations experts. We are really emphasising this MSCI change could have an unexpected impact.
The portfolio manager is used to a certain range of investor relations activities from companies he is used to investing in. Managements see them more often, communicate more often and Asian companies haven't done that systematically. They may do a non-deal roadshow but it will often involve the investment relations officer and not senior management. That may have to change.
Will these Korean companies, in particular, be forced by these potential MSCI changes to hire an IR person in New York?
Actually not every company has an IR person in New York. In fact, the minority do. I don't think that's going to be necessary. They are just going to have to be more involved with investor relations, which at a minimum means going out and meeting investors more consistently - plus other IR-related areas like websites and press communications, and possibly a bit more English speaking expertise in this area.
Our overall feeling net-net is there will be more money coming into Korea thanks to this change to the index.
And Taiwan will benefit because it will get an increased weighting in the emerging markets index, minus Korea?
Yes, both markets benefit.
This has been talked about for a while. You think it will happen this year?
It will happen this year. However, just because it happens it doesn't mean it will get implemented right away. It is normally phased to give fund managers time to adjust. But I think it will happen this year.
There have been an increasing number of POWLs to tap Japanese demand. Is this a threat to ADRs?
I don't see it as competition. If you have a large sized deal of $500 million or more, you have to tap US investors and you will probably need to do an ADR. And if you are in centre industries such as technology, even if you are doing a smaller listing, you will attempt to list in the US. Then there is the prestige factor - if two of your competitors are listed on the New York Stock Exchange, the third one feels like it has to.
So I don't see it as competition.
In Asia we tend to talk about Chinese capital raisings a lot. Are you bullish on the prospects for issuance out of India?
Yes, our numbers - which could be conservative - is that there will be $15 billion of fundraising from China and $10 billion in India. That's total capital raising, not just ADRs. Those are big numbers, and every day the estimates rise.
Do you think perception-wise India has now turned a corner and is getting more investor attention?
Yes, and the Indian market is up quite a bit. You hear "India" very often these days and a few brokerage firms have India on a higher allocation than the index weighting. A lot of people are recommending overweight India. The growth rate is in the 8-10% range and the infrastructure for investing has improved, while the political situation is looking better.
