Asian IPOs forge global optimism

While 2012 doesn’t seem overly distant to many of us, in Asia’s IPO market it seems to be long forgotten – perhaps because it was particularly dismal.

The Asian market suffered a decline in both the number of IPOs and the value of listings. The total value of IPOs fell by 35 percent to $57.1bn deals, down from $87.8bn in 2011, according to data provider Dealogic.

The statistics were stark across the majority of Asia’s developed economies. According to CNBC, Hong Kong’s stock exchange (SEKH) witnessed a 14.29 percent drop in the number of listings and a 75 percent drop in value of listings from the year prior. Singapore was almost on par, with a 15 percent drop in IPO issues and a 43.96 percent drop in values. The silver lining was Malaysia – which unlike its regional siblings, experienced a 260 percent jump in the value of listings. However, it too experienced a decline of 50 percent in the number of issues.

What was behind the dramatic downfall in Asia’s IPO sector? Put simply: unattractive market conditions. Negative economic sentiment and instability in global markets dampened investor appetite for all forms of public fundraising. The euro crisis, the US fiscal cliff and a botched Facebook IPO all left their mark and added caution to the wind, muting many of the planned IPO activities.

The new climate of 2013
Fast forward to 2013, and we get a staggeringly different picture, even this early in the year.

An explosion of recent IPO activity in Asia is driving hopes for a resurgence in the initial public offerings market, both for the region and also globally.

The Financial Times has reported that across Asia-Pacific, excluding Japan, equity capital market volumes are at the strongest since 1995, at $24.6bn; almost four times the $6.4bn raised in the same period last year.

According to the Financial Times report, notable players include China’s Sinopec Engineering, which filed for a $1.5bn listing this year, and China Galaxy Securities which also filed to raise as much as $1.9bn. Copper company Chinalco Mining Corporation International also raised $400m early this year and China Petroleum & Chemical Corp recently completed a $3.1bn equity follow-on issue. In February, Hong Kong had raised $788m since January 1, compared with $227m over the same period last year.

But while Hong Kong’s recent surge in equity capital market activity is noteworthy, there’s another bright star in Asia’s burgeoning IPO market.

The new poster child for IPO activity is Japan. Japan – a country many investors have long judged by its stagnant growth rates and aging population – has re-emerged on the world stage as a beacon of hope for positive equity market activity.

Japan has witnessed $1.4bn in IPOs since 1 January 2013, in contrast to $18 million over the same period last year. In fact, firms have raised more funds in Japan this year than in Asia’s other developed markets combined. Ben McLannahan at the Financial Times has reported that worldwide it now ranks number two by funds raised according to Dealogic.

Perhaps what has really gotten investor and analyst attention is the IPO of Prologis REIT in March, a Japanese real estate investment trust set up by the world’s largest owner of industrial buildings. The IPO raised an impressive 100.3 billion yen, after bids were outnumbered four times. Shares surged by over 27 percent on open to 700,000 yen. The IPO comes at a pivotal for the firm, which is experiencing rapid growth in its e-logistics and modern warehousing operations due to quickly expanding consumer demand for online shopping.

This IPO is notable for its high valuation, but also because it demonstrates a commitment of foreign investment support back into the country. [According to the above Financial Times report], net buying of Japanese equities by overseas investors came to more than 1 trillion yen in the first week of March 2013, the highest weekly figure on Tokyo Stock Exchange back to 1982.

Why the change of heart?
Since the financial crisis, the equities market across the world has been like the losing team on a football field; the safe-haven retreat of bonds has won the game every time.

Equity markets – and particularly the IPO space – has been eerily quiet until recently, due largely to the fragile global economic climate and continued turmoil in world markets. So what has contributed to this rapid change of direction?

In the case of Japan, the lift in IPO activity comes at the same time as new Prime Minister Shinzo Abe’s monetary policies are released – seen by many as the game-changer needed to pull Japan out of its recession and years of deflation.

Abe’s promise to strengthen the world’s third largest economy through more assertive monetary policy has re-energised investors. What’s been referred to as ‘Abenomics’ sees Japan taking bolder policy steps than ever before. To help boost growth, earlier this year the Bank of Japan announced it would double the inflation target to two percent and committed to an open-ended asset purchase program starting in 2014.

More aggressive monetary policies are being seen across Asia more broadly. The MSCI Asia ex-Japan index has steadily risen nearly 15 per cent from September last year, largely on the back of central bank actions and improving market sentiment.

‘The great rotation’ is upon us
Improving market sentiment and central bank actions are all helping lead investors out of bonds and back into equities – this change in direction has been dubbed ‘the great rotation’ as investors get back into the search for yield.

It is an especially prevalent trend in emerging markets. According to fund-tracker EPFR, some $7bn of inflows to emerging market equities in the first week of 2013 were the largest on record, also outstripping demand for emerging bond funds for a full five weeks.
Consider that Asian companies have sold more equity in capital markets in the past five weeks than any start to the year since records. Japan’s Nikkei stock index has done particularly well, rallying around 44 percent since mid-November.

Yet the rapid pace at which this tilt back into equities has occurred also begs some important questions. Is this surge in IPO and equity market activity sustainable in the long term? Or is it early-year optimism, which hasn’t correctly priced in potential market risks that may still cause a retreat back into bonds? In other words, is Asia’s IPO market overweight?

For Japan, there is concern by some that the government’s proposed monetary policy changes are not enough to deliver long term growth, unless accompanied by broader structural changes. So far, no tangible discussions or action have taken place to tackle broader issues – such as altering immigration policies to help deal with an aging population; or deregulating protected sectors like agriculture. There is apprehension that without the broader reforms, the ability of monetary policy to drive long-term growth is limited.

Considering Japan’s monetary policy alone, some ask if the current reforms are going to be enough to achieve any noteworthy growth at all. There are no clear timelines to meet the new inflation target and it is likely that more aggressive quantitative easing (QE) will be required to meet any expected gains – something the BoJ has been long opposed to. Albeit, the expected leadership reshuffle in the BoJ later this year may change that. More broadly, the continuing devaluation of the yen is also a cause for concern.

More broadly across the region, potential risks such as increasing inflation rates, an outflow of hot assets from the region, North Korea’s ongoing nuclear program, Europe’s continuing turmoil and its potential spread, are all things that could trigger further global uncertainty and lead to investors swiftly marching back out of equity markets.

End of uncertainty
But just how likely is a retreat at this stage? And how much does it really matter if IPO listings are currently overvalued?

Many think a retreat out of equity and IPOs in the latter part of this year is unlikely and believe that investor appetite in Asia’s IPO market is on track for growth.

This is on account of a few things. Firstly, many argue that we’ve seen the worst of the global economic uncertainty last year and that any macro-risks are already priced into the IPO market.

In addition, ongoing aggressive action from central banks is likely to continue to promote and enable growth.

Moreover, the fact that many deals so far have been over-subscribed suggests that there is hot cash ready and waiting for further listings.

There is also a strong pipeline of deals lined up. Because Asia’s economies are still emerging, many of its small to medium sized businesses are now at a stage in their development where a public float is the rational next step. This is particularly true for firms in high-growth industries such as metals and mining as well as real estate and infrastructure. The majority of IPOs in Asia are expected in the second half of the year and are also likely to include some that were put on hold last year on account of a poorer economic climate.

Whether the market is currently overpriced or not in the short term, may not matter hugely. Emerging market companies getting more cash to revinvest in their businesses in the short term at a pivotal point in their business life cycle is arguably a positive thing for their long-term growth and for that of their local economies. Any initial over-weight positions are likely to correct themselves and rebalance in the medium term as those companies use the capital injections to fund growth.

With a robust network of investor support not likely to go away any time soon, all signs point to a boom of Asian IPOs now well and truly on our doorstep.