The outlook for Asia’s capital markets has changed dramatically in the first six weeks of 2016 – and not for the better. Most outlooks conceived before the end of last year had been torn up by the middle of January, written off as overly optimistic projections after a rout in commodity prices and global equity markets savaged global confidence.
The pages of this report will hopefully be spared a similar fate. With the benefit of time, it is now clear that Asia’s financing markets are in for a hard year, as arrangers and investors struggle to reach their targets against a tide of risk aversion.
Monetary conditions may be still easy across the world, but raising capital is far from a simple undertaking. Global demand for emerging market debt is on the wane, thanks to a strengthening US dollar and worsening sovereign finances in much of the developing world. Companies will need to convince investors that they can overcome those concerns if they are to continue to access international capital.
Alternative markets that had looked so promising barely six months ago are now clouded in uncertainty. The offshore renminbi bond market has stalled as China’s currency slides, and hopes of a wider capital markets presence for the financial technology sector have taken a knock from a massive Chinese scandal. Even covered bonds, billed as the perfect instrument in a volatile market, have been slower to take off than expected.
Asia faces a potentially tougher challenge than other regions, as slowing Chinese demand is compounding a global slump in commodity prices. India, which benefits from cheaper oil imports, is a brighter spot than most, but the smaller scale of the county’s economy means it alone cannot take up the slack.
After a strong run since the 2008 financial crisis, it seems there are no free lunches left in Asia’s capital markets. Market participants are going to have to grind out whatever results they can manage in 2016.
That, however, is no reason to panic. Asian companies and governments still need funding, and windows of opportunity still exist for those who can time it right. The competitive landscape is also changing as global firms refocus their efforts closer to home and tougher bank capital regulations force underwriters to reduce costs. Arrangers with strong client relationships and superior execution abilities can do well.
Volatile conditions will certainly test the commitment of any firm that depends on capital markets for revenues, but the challenges of 2016 will also translate to higher standards in Asian financings as weaker issuers and underwriters are squeezed out. If efforts to grind out results in a difficult market help create a healthier, sustainable platform for future capital raisings, then the hard work will have been well worthwhile.
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