Risk is back in the financial markets. Just look at the fact that assets under management at hedge funds jumped by $100 billion in the second quarter as investors begin to put cash to work again.
It is not just hedge funds that are benefiting from improvements in liquidity. Emerging markets are riding the wave too. Inflows into dedicated emerging markets equity funds this year are $32 billion, according to data tracker EPFR Global. There is also strong momentum behind bond funds investing in the developing world. These saw a 15th consecutive week of inflows in the week ending July 24, with those portfolios specializing in riskier local-currency debt accounting for more than half of the flows into the overall asset class.
These flows are being channelled into the capital markets. Three recent deals are testament to how far sentiment has changed over the past few months. In Qatar, gas company Ras Laffan LNG issued a triple-tranche bond for $2.2 billion. The transaction attracted $17.6 billion in offers – the biggest-ever order book for a Middle East bond.
In the equity markets, IPOs from China State Construction Engineering Corporation and BBMG, a Chinese construction materials maker, also attracted big demand. At $7.3 billion, China State Construction’s transaction is the world’s biggest debut offering this year. The transaction was listed in Shanghai and was priced at the top end of the indicative range. Even so, the retail tranche was 48 times oversubscribed and the institutional tranche was 38 times covered.
BBMG’s listing was in Hong Kong. Although the amount it raised, just over $883 million, was small compared with China State Construction, the IPO garnered great demand too. The retail bid was about 775 times oversubscribed.
That the capital markets are functioning again in the developing world is something that should be applauded. Bankers will be especially pleased to see the Chinese IPO market open after a nine-month hiatus – there is a strong pipeline of deals. That the outcome of all three transactions was successful is equally pleasing.
There is, though, something unnerving about the extent to which investors are clamouring for these deals. The size of the order books partly reflects the limited supply. China State Construction is only the fifth IPO from the mainland since the authorities lifted a moratorium in June. Qatari borrowers are also still a rare species, although Qtel and the sovereign have also issued this year. Government financial support in both countries, moreover, was an additional attraction for investors, as was the quality of the companies raising the funds.
Still, the frenzied demand is more reminiscent of the last days of a bull market than the worst financial crisis in 70 years. Investors would do well not to get too carried away.
