Year opens on positive note, but ECM activity seen as thin

A few block trades and follow-ons, and possibly one or two convertible bonds, could add some life to what is expected to be a very quiet January in the Asian equity capital markets.
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Trading in Hong Kong showed little conviction yesterday (AFP)
<div style="text-align: left;"> Trading in Hong Kong showed little conviction yesterday (AFP) </div>

There was a strong tone in Asian stock markets yesterday when Hong Kong and Singapore kicked off trading in 2012 thanks to a positive purchasing managers index in China that caused some enthusiasm among investors. But the 2.4% gain in the Hang Seng Index and the 1.6% rise in the FTSE Straits Times benchmark were logged amid thin volumes and hence didn’t display a huge amount of conviction.

That said, bankers hope that a few more days of gains could trigger some modest block trade activity or follow-on share sales to break up what is otherwise expected to be a very quiet month in the equity capital markets. From a seller’s perspective there are still stocks that are trading within 10% of their 52-week highs that could fetch a good price, but it is not clear if there will be any buyers — especially since equity markets are expected to remain muted and volatile during the next few months at least.

Stories highlighting the $7.6 trillion of sovereign debt that needs to be refinanced this year clearly don’t help, even if more than two-thirds of that refers to borrowings by Japan and the US, neither of which is expected to have any trouble finding buyers for their debt.

Investors didn’t make much money on the stocks they bought through the Asian capital markets last year — in fact, on most initial public offerings, they lost money — and that is obviously weighing on their appetite. It may be a new year, but sentiment hasn’t changed and most market watchers say investors will stay cautious and selective. They also suggest that there will be a lot of rotation between stocks in the first few weeks rather than a lot of new money flowing into Asia.

One banker argued that some of the Hong Kong IPOs that were pushed out towards the end of last year were priced too aggressively, which will make it more difficult to bring new deals now. “The market is brutally honest when it comes to mispriced IPOs,” he said.

There tends to be a general belief that funds have cash to invest at the start of a new year that will support the markets in the first month, but historical data doesn’t actually support such a “January factor”. The last time the MSCI Asia ex-Japan index gained in January was as far back as 2006 and in some of the years since then the index has racked up significant losses in the first month of the year, Bloomberg data show. The index fell 6.1% in January 2010, 5.6% in 2009 and 14% in 2008. Last year it lost 1.1%.

Bankers said yesterday that while they are in dialogue with some potential sellers, everyone wanted to see how the first US trading session of 2012 progressed overnight and also how China’s A-share market opens the year today. The message from the US was positive with the Dow Jones index up 1.5% and the Nasdaq Composite adding 1.7%. This is bound to lend support to Asian stocks today and perhaps bring more buyers into the markets. And that, in turn, could boost confidence among potential sellers and bankers to launch a few block trades. The sellers may want to wait for the share price to go up another few percentage points, but if they are keen to sell they are unlikely to dare to wait too long.

There was also some talk yesterday that there could be one or two convertible bond issues during the next few weeks, although it is not clear which issuer would be willing to go first. Again, many of last year’s CBs are trading below par as share prices have come down.

IPOs are an entirely different matter, as they take much longer to complete. And since the first issuing window this year is very short with Chinese New Year falling early on January 23-25, market watchers and participants do not expect any Asian IPOs of size to launch until late January at the earliest. While it is technically possible to have the marketing straddle this holiday, few issuers choose to do so as many fund managers and investors take time off during this period. In China and Taiwan markets and banks are closed for an entire week.

“I don’t think anyone is going to do anything really brave or really stupid in the next few weeks,” one syndicate banker said.

Asian companies seeking a listing in the US may be an exception, say bankers. The marketing period there is shorter, which means you can get an IPO completed before Chinese New Year. In Asia, an IPO typically takes four to six weeks to complete and there is a lag of at least one week between pricing and listing that adds a lot of price risk for investors. Or as one banker put it: “The settlement period in the US doesn’t freak people out.”

US IPOs also have a lot more flexibility with regard to pricing since the final price can be fixed 20% above or below the range without having to re-file. This means the issuer can adjust the price lower if the secondary markets were to take a hit during the marketing period. This isn’t possible in Asia.

When the Asian IPO activity does resume in late January and early February, the first deals to hit the screens are likely to be those that were in the market in 2011 — especially in the fourth quarter — but were pulled due to insufficient demand. It is a long list and not all of them will be able to return straight away as they may have to update their financial data first. But among the potentials are large-cap issuers like Haitong Securities, Sany Heavy Industry, XCMG Construction Machinery and China Everbright Bank. Together, these four companies were initially aiming to raise up to $11 billion, although deal sizes are expected to come down when the companies return to the market.

Other deals that were initially planned for 2011 and that are being watched with interest include China Guangfa Bank, Chinese department store operator Charter Group and the Manchester United football club.

Large IPOs that are in the works for 2012, such as Chinese insurance company PICC Group, Graff Diamonds, and the Tavan Tolgoi mining business in Mongolia are not expected to hit the markets until the second quarter at the earliest.

According to Dealogic data published overnight, the ECM volume in Asia ex-Japan reached $167.1 billion in 2011, down 46% from the record high of $311.7 billion in 2010. The IPO volume amounted to $77.2 billion, which was less than half of the $163 billion raised in the previous year.

Equity-linked issuance also fell significantly to $19.7 billion from $27.3 billion in 2010.

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