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Asia ECM: proceed with caution

By John Loh
13 Dec 2016

Most ECM practitioners in Asia are set to end 2016 not with a bang but a whimper. But even after such a volatile year, they are heading into 2017 with a rosier view of the market. Given the topsy turvy events of this year, the better strategy would be to err on the side of caution.

To call 2016 a roller coaster ride would be an understatement. After China's equity market madness in the summer of 2015, banks had thought they would be in for a calmer year, which was not to be.

That ECM shops will end 2016 with much lower volumes than the previous year is a foregone conclusion, and bankers could be forgiven for wanting an early, quieter end to the year, instead of pushing deals out until Christmas as is the norm.

From the outcome of Brexit to the US elections, market participants had to reset expectations every step of the way. What anyone thought they knew about markets was turned upside down. 

If being buffeted by volatility from all sides was not enough, the threat of job cuts hung over investment banks’ equities desks for much of the year. And a shrinking pie in Asia ECM only paved the way for Chinese banks to make outsized gains in the global league tables.

But as the year draws to a close, ECM bankers GlobalCapital Asia  has spoken with over the past two weeks are holding out hope that after an annus horribilis, things can only get better. The New Year, after all, is for starting on a clean slate.

To be fair, there are good reasons to believe that a turnaround is imminent. Confounding the naysayers, oil and commodity prices are finally on the upswing, while investors seem ready to turn risk-on again as stocks in the US notch daily record highs amid the great rotation back to equities.

The reality, however, could be much more sobering. Much like 2016, next year will be marked by major elections in Europe as well as a political transition in China. In addition to Donald Trump taking office in January, there is no telling what the outcome will be when his new policies are put in place.  

Rates are poised to rise in the US following years of record low interest rates and already, the spectre of US monetary tightening has fuelled a rally in the dollar and outflows from emerging markets, making 2017 look all the more uncertain.

Meanwhile, yet more consolidation is in store for banks with a shake-out needed, especially among global banks. The value that western banks bring to the table in Asia ECM has come into question and will continue to be debated, at a time when even Chinese banks are doubting each other’s business models.

Although few banks are promising a big increase in budgets for 2017, what this year’s events showed is that it is best to set the bar low and keep an open ended view on next year.

There is every possibility that 2017 could turn out to be the banner year that people have been waiting for. But in times like these, the sound advice would be to under promise and over deliver.

By John Loh
13 Dec 2016