IFR Review of the Year 2006
The past 12 months in international capital markets have been the most benign – certainly the least turbulent – in years, and it still seems too early to call time on the general market ebullience.
Cast your minds back to 2005 and you will recall that it was a full of market participants making doom and gloom predictions about the impending turn in the credit cycle and the impact that would have on risk pricing and on the market psyche.
It was always clear that the sheer amount of liquidity looking for a home would put a cap on credit-spread widening, equity price weakness, and new-issue pricing. And so it proved. This market is still not really about fundamentals. The multi-billion dollar collapse of hedge fund Amaranth barely caused a flutter, and no-one really buys the notion of market contagion caused by a single event any more.
Excluding some price weakness in the middle of the year, not even the prospect of continued Fed and ECB rate tightening or an economic slowdown put the market off its stride. The consensus is now for a soft landing. Investors – hedge funds, real-money accounts, private clients and retail buyers – continue to plough cash into structured products, emerging markets, exotic risk and alternative investments.
The quadrupling of inflows into commodities, to US$100bn, has caused little concern, not just because a lot of exposure is principal protected, but because commodities are seen as uncorrelated and investors are still underweight the asset class.
The creation and transfer by major dealers of countless billions of dollars of exotic and illiquid risk out of the financial sector may worry regulators because of the theoretical risk to the system, but there seems to be a consensus that the distribution of risk to thousands of different places can only be a good thing.
Even the much-vaunted busted LBO phase appears to be no closer in December 2006 than it was a year ago. Leverage multiples in buyouts appear unchanged, and there has been no reversal in the trend towards lighter covenants, lower pricing and longer tenors. Financial sponsors are still flush with cash, especially as 2006 was actually a good year in which to take money out through realisations.
There is little doubt that we are reaching the top of the cycle, but predictions about when it will turn now focus on the end of 2007 or 2008, if then.
Overall then, 2007 is looking like a good year for the capital markets. Corporate deleveraging has reversed, and there is a solid redemption pipeline, both of which should lead to some decent primary action.
This Review of the Year accompanies the final issue of IFR for 2006. The first issue of 2007 will be published on January 6. I look forward to seeing many of you at the IFR Awards Gala Dinner at the Grosvenor House Hotel in London on January 8 2007, but please allow me to take this opportunity to offer all readers my very best for the holidays and good fortune and success in 2007.
