Asia’s capital markets: in for a rough ride
Asia’s capital markets had a hot first quarter, with volumes soaring across both DCM and ECM. Momentum still appears strong — but market participants should brace themselves for a tough time ahead.
Capital market activity so far in 2021 has been nothing short of exuberant.
In Asia Pacific ex-Japan, G3 bond volumes in the first quarter rose 22% to $231.5bn, shows Dealogic. On ECM, volumes in Asia ex-Japan stood at $122.9bn in the first three months of 2021 — a whopping 147.8% jump from the $49.6bn recorded during the same time last year.
There were some key drivers for the strong start to the year for Asia. A combination of super-low interest rates, flush liquidity and rallying stock markets stoked issuer frenzy across both ECM and DCM. In the bond market, January in particular saw a breakneck pace of deal flow, while ECM volumes in the region have been driven in large part by the rush of secondary listings of Chinese companies in Hong Kong.
But is the party in Asia coming to an end soon? Market fundamentals haven’t changed much — but issuers, investors and banks should prepare for a much tougher second quarter.
There are pockets of risks looming in different parts of Asia, the key being a fresh spike in the number of Covid-19 cases.
In India, for example, where daily cases had dropped to fewer than 20,000 in January from about 90,000 in September, a second wave has arrived. On April 4, India surpassed 100,000 daily infection cases for the first time since the pandemic hit the country, the bulk of which were confirmed in the financial capital of Mumbai.
Although the Nifty 50 index is up about 5.7% year-to-Wednesday this week, it has fallen about 1% in the past one-month period. The BSE Sensex is up 3.7% year-to-Wednesday, but has slumped 1.5% in the past month. The state of Maharashtra, the capital of which is Mumbai, was put on lockdown from April 5 — a move that is expected to shave off about $5.4bn from India’s GDP for the year ending March 31, 2022, according to Care Ratings.
There are other bleak stories too. In the Philippines, the benchmark PSEi Index has tumbled by more than 7% so far this year, and is expected to fall further amid a surge in Covid-19 cases. The capital Manila, alongside four neighbouring provinces, are on lockdown again as the authorities work to curb the spread of the pandemic. Foreign investors have stepped back from the country, and the fresh lockdown is set to take a toll on the Philippines’ growth trajectory.
New Covid clusters have also emerged in the Thai capital of Bangkok, forcing a temporary closure of entertainment, food and beverages, and lifestyle venues in the city this month.
Covid will not be the only cause of concern for capital markets in the region over the next few months. The unravelling of huge losses from the meltdown of US hedge fund Archegos Capital Management is likely to ripple through to Asia’s markets as well.
When the US-based fund defaulted on a series of margin calls from bulge-bracket banks last month, brokers began offloading huge blocks in a handful of US-listed Chinese companies, including well-known firms Baidu and iQiyi. Their stocks plummeted in the immediate aftermath of the sales — spooking investors and forcing many to go on a risk-off mode.
The saga is unlikely to be over yet, and could create more volatility that banks and issuers will have to navigate.
In the bond market too, turbulence won’t be too far away. US Treasury yields have risen this year, making deal execution and pricing more challenging. A handful of Indonesian companies, particularly those in the textile industry, are under rising liquidity pressure, with bankers set to keep a close eye on the industry to look out for any spill-over effects. In China, recent defaults of state-owned companies have raised questions about government support for these firms in times of crises. Investors will need to watch out.
Do all these mean that deal flow in Asia will be in danger over the next few months? That will depend on individual issuers, any pressing need they may have to tap capital markets when issuance windows open, and their willingness to pay up to get deals across the finish line. They should not expect an easy ride.