Asian equities: Bankers prepared for 2011 reality check

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By:
Lawrence White
Published on:

IPO outlook solid for 2011; Banks fear investor euphoria threatens danger

Leading bankers in the region say the outlook for capital markets in Asia is good in 2011 but that they will struggle to repeat last year’s record-breaking levels of equity issuance. According to figures from Dealogic, issuers in Asia (ex Japan) raised a total of $158 billion through initial public offerings in 2010 (as of December 21), smashing through the $100 billion mark for the first time. That constituted 57.5% of global IPO volumes.

In the league tables, the big story is the possibility that in 2011 UBS will be unseated as top dog for volume in Asia. Led by the volumes generated by Chinese dealmaker Henry Cai (now with Deutsche Bank), UBS has topped the volume charts in Asia in the past few years and looked as if it had clung on to the top spot at the end of 2010 despite the predictions of competitors. Dealogic’s table had the firm top in Asia Pacific (ex Japan) rankings, with $29.6 billion-worth of deals, as against second-placed Goldman Sachs with $24 billion. Morgan Stanley climbed to third place from last year’s fifth, with $22.6 billion.

Silence

Competitors have been briefing all year that UBS is not the force it was in Asia-Pacific equities, having lost global capital markets head (Asia) Steve Barg and Asia equity capital markets head Mark Williams as well as Cai and team, so their successors will be pleased to have retained the top spot in both volume and revenue rankings for 2010. If it can repeat that performance with newly sourced business in 2011, the competition will have been truly silenced.

"Repeating 2010’s volumes in 2011 will be a challenge given the lack this year of equivalents to last year’s mega deals, namely AIA and ABC"

Mark Warburton, Macquarie
 

Mark Warburton, head of equity capital markets Asia at Macquarie
While 2010’s volumes of new equity issuance were extraordinary, two record-breakers account for almost a fifth of the total. They were Agricultural Bank of China’s $22.1 billion IPO, the largest listing ever, and AIA’s $20.5 billion IPO, the biggest-ever Hong Kong deal. Mark Warburton, head of equity capital markets Asia at Macquarie, says: "Repeating 2010’s volumes in 2011 will be a challenge given the lack this year of equivalents to last year’s mega deals, namely AIA and ABC. Issuers wanted to keep out of the way of those two deals in 2010, and by the end of the year sheer deal fatigue contributed to the number of pulled deals we saw. The good news is that now with the pipeline clear of $20 billion deals, those postponed deals can come back to market."

Those pulled deals included Huaneng Renewables Corp’s $1.28 billion deal, cancelled in December. The company, a Chinese wind-power provider, was set to list in Hong Kong but cited the weakening equity markets and the failure of world authorities to reach definitive agreements on climate change response as reasons for the cancellation. With the outlook for Asian equities improving, and a new year beginning, bankers expect that some of these pulled deals might come back.

"At the end of last year investors absorbed $100 billion-worth of Asian issuance in a few months," says an equity capital markets banker in the region. "I was at an investor event in early December and many of our clients were just saying they didn’t want to look at anything more until January at the earliest."

Now it seems investor enthusiasm has returned to the point where at least one bank is urging a note of caution. Investors are increasingly giddy about the prospects for Asia’s equity markets in 2011, writes Ajay Kapur, head of Asia equity strategy at Deutsche Bank, in his chapter on the subject in Deutsche’s report Markets in 2011: "Deutsche Bank’s ‘risk-love barometer’ – which tracks the number of Asian equity indicators showing extreme euphoria minus the number exhibiting extreme panic – has gone off the scale in recent months to reach euphoric levels. Nearly every investor we talk to is a committed bull."

Sentiment

Kapur’s observation is that regions that over-invest tend to lag in the next cycle; in the past few years Asia has been investing heavily relative to the US and Europe and if the pattern holds, Asian companies’ returns on equity will lag that of their global peers in the coming cycle. "Historically," Kapur says, "little good has come from jumping on the bandwagon when equity sentiment on emerging markets is as bullish as now. We think any pullback in equities/sentiment would offer a much better opportunity to recognize substantially improved equity fundamentals in Asia."

Nonetheless, capital markets bankers seem confident that issuers are as bullish as investors about the region.

 

Philip Partnow, deputy head of investment banking and head of M&A at UBS Securities

"The question on investors’ minds is whether there’s going to be a more robust inflation response in China as 2011 develops"

Philip Partnow, UBS

"We have metals and mining, real estate, infrastructure and consumer deals in the pipeline and are expecting financial services deals later in the year," says Macquarie’s Warburton. "In terms of geography an interesting trend will be the arrival of more global listings in Asia: companies from Africa, Kazakhstan, Russia and other markets are all looking."

China and India are expected to drive the bulk of new issuance again, despite having already reached record annual volumes in 2010 of $100.8 billion and $10.6 billion respectively. In 2010 there was also a record number of deals in China (681, compared with the previous record, in 2007, of 466), and a record share of the Asia-Pacific region’s total volume at 52%. It is unlikely, China bankers seem to agree, that this performance will be repeated in 2011.

Choppy markets

"Markets will continue to be choppy, but you will see deals get done," says Philip Partnow, deputy head of investment banking and head of M&A at UBS Securities. "The question on investors’ minds is whether there’s going to be a more robust inflation response in China as 2011 develops; they are also being much more selective in which deals they will look at."

Partnow says that there might also be a preference for small and medium-sized deals, as opposed to the blockbuster privatizations that have characterized the past few years. "In terms of sectors," he says, "we are seeing consumer, internet and tech, pharma, clean/green tech and natural resources – all the sectors that benefit from the growth of the middle class and the expansion of the domestic economy."