ECM issuers should put sullen summer behind them
The stock market has endured its worst summer in years, with the turmoil in China wiping out trillions in market value and causing ripples around the world. But a crucial window will open up for share sales in Asia once China concludes its Golden Week holidays in early October. Issuers should grab the opportunity to light a fire under equity capital markets.
In a year when Chinese equities have risen and fallen like a dragon’s back, it’s no wonder issuers and investors are still trying to wrap their heads around the market. The volatility has delayed trades in Hong Kong from a number of China’s state-owned giants — deals expected to be among the year’s biggest IPOs.
There are plenty of reasons why investors are skittish on Asia, and especially China, which continues to hog much of the limelight. For starters, three of the four sizeable IPOs planned for the next few weeks are Chinese financials, a sector which has gone from hero to zero in a matter of months.
New Hong Kong listings from the financial industry that priced since mid-June, when the ascent in Chinese stocks screeched to an abrupt halt, have tumbled an average 20%. HTSC and GF Securities, two of 2015’s biggest debuts in the city, are down 35% and 24% respectively from when they priced their IPOs.
That slide has spooked the primary market. And bankers are choosing to err on the side of caution and soft-sound investors on planned transactions rather than go out with guns blazing.
But several factors are converging to make early October the right time to launch IPOs. And market participants should grab this chance or miss the boat.
To start with, one of the summer’s most-anticipated events for global financial markets is out of the way, with the US Federal Reserve deciding not to raise interest rates at its September 16-17 meetings.
The non-hike has led to some certainty, with Asian markets slowly starting to creep back into positive territory this week. But the thing to remember is that the outcome of the next Fed meeting, scheduled for the end of October, could set stocks roiling again. While the issuance window is opening up now, it can close rapidly too.
In Hong Kong, upcoming listings also have to contend with an added layer of compliance. As the rules have it, IPO hopefuls that have already applied to float need to either launch their deals by early October or update their financial statements with the market regulator — forcing them to push back trades by at least a few weeks.
Delaying an offering a little bit to get the paperwork sorted is no big issue under regular circumstances, but since the summer rout markets have been anything but ordinary. Where stock prices will end up in a month’s time is anyone’s guess.
Which is why issuers should hit the market sooner rather than later. China’s over-exuberant, speculation-fuelled market is not the same animal it was earlier in 2015, after many investors had their fingers burnt.
This, in turn, has cleared the way for the return of institutional, fundamental investors. It is these investors that will be best-placed to see value in the market and think long term rather than look for short-term gains.
The downside risks in this environment are also limited now as valuations are far more attractive, and investors have plenty of cash to put to work. This is clear from the level of early interest seen for IMAX China, which launched a HK$2.14bn ($276m) IPO this week, and the demand for two small north Asian blocks at the end of last week.
There is no denying sentiment is weak, but the key for momentum in the Asian ECM world is a successful benchmark trade to start a chain reaction. Issuers have the chance now to come and wow the market, or wait and keep investors guessing.
The market is kindling back to life. Someone just has to start the fire.