Growing pains

After the volatility that defined much of 2018, capital market bankers in Asia started the year full of trepidation. Would the Federal Reserve speed up its slow-motion rate rises? Would Chinese defaults become a major problem? Would investors extend the period of hibernation they began during the bearish end to last year?

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It is clear at the end of the first quarter that all of those questions have been answered in the negative. But across Asia’s capital markets, volumes are languishing rather than thriving.

Equity capital market volumes in Asia ex-Japan reached only $38.8bn by March 18, well down from the $56.8bn achieved in the same period last year, according to Dealogic. These figures reflect moments of worry, including when a planned real estate investment trust listing by South Korea’s Homeplus Reit was scrapped in March, bringing an end to one of the most anticipated deals of the year. 

But bankers arguably have more cause for excitement than fear. The creation of a new technology board by the Shanghai Stock Exchange, as well as looser rules for listing in Hong Kong, have fuelled hopes that more of China’s high-profile tech IPOs can stay in Asia. India’s own experiment with real estate investment trusts also looks likely to bear fruit. Embassy Reit, the first such deal, was due to price as this publication was going to press.

Bonds have also had a strong start, albeit a more sedate one compared with the breakneck beginning of 2018. By March 18, issuers in Asia ex-Japan had sold around $90.4bn of dollar, euro and yen bonds, according to Dealogic data. That was a 10% drop from the same period in 2018 but the number of deals — 195 — was the same. This highlights one of the big problems facing banks: how to staff their syndicate desks. 

Chinese issuers, nervous about hitting their funding targets in one go, are returning to the market numerous times in the space of a few months, tapping their deals until they hit the intended size. That doesn’t mean any extra revenue for banks but it does mean a lot more work. Most debt syndicate desks in Asia are short-staffed, relying on a handful of capable bankers to execute deals well. That model works fine when the pipeline is full of big deals spaced out nicely over the year. But when tiny debut issues and $50m taps become the norm, the sheer number of deals threatens to overwhelm banks.

The loan market looks more hopeful, although that is perhaps only because bankers have grown used to losing much of their business to the bond market. The pendulum appears to be swinging the other way. Bankers make clear in this report that leveraged finance, the most profitable part of the loans business, is on track for a strong year.

There are, of course, risks. A trade war between China and the US now appears unlikely, but it is impossible to predict whether US president Donald Trump will change his stance as he prepares for elections in November 2020. The UK’s exit from the European Union offers another potent source of volatility. US interest rates, meanwhile, are only one central banker comment away from being a risk factor rather than a safety blanket.

The rise of Asia’s capital markets is undeniable, perhaps even unstoppable. But there will be bumps along the way — including many before the end of 2019.