2022 in numbers

While equity capital markets bankers around the world spent much of 2022 twiddling their thumbs, those in the Middle East were busier than they’ve ever been. IPO volumes across EMEA dropped to just US$39.1bn in 2022 from US$112bn in 2021, according to Refinitiv data, while Middle East IPO volumes increased to US$23.1bn from US$13.4m. Put another way, the Middle East accounted for 59% of IPOs by volume in the EMEA region in 2022 against only 12% in 2021, while the number of IPOs in the Middle East surged to 56 from 41. As a result, Middle Eastern banks Saudi National Bank, EFG Hermes, Riyad Bank and First Abu Dhabi Bank were among the top 20 bookrunners in EMEA in 2022. In 2021, the top ranked regional banks were SNB in 36th and EFG Hermes in 50th. The surge in the Middle East meant that volumes in emerging EMEA (as opposed to the wider region) held up remarkably well. “A decrease in the overall volume of ECM in the emerging EMEA region happened but it was almost entirely made up by the Middle East region – more than offsetting the complete shutting down of the Russian ECM market,” said John Wilkinson, head of emerging markets ECM at Goldman Sachs. Bankers said the prominence of Middle Eastern transactions will reduce in 2023 as European issuance normalises. They are clear, though, that 2022 was no flash in the pan and a fundamental realignment has occurred. “UAE and Saudi are the ones that have the powerful combination of relevance on a global scale in terms of their participation and weighting in the MSCI indices. They are important countries for international investors from an index perspective and also have very deep and captive investor bases,” Wilkinson said. The biggest transaction out of the Middle East in 2022 was the US$6.1bn IPO from Dubai Electricity & Water Authority. That privatisation was only the third US$6bn-plus IPO in the EMEA region since 2010 until Porsche overtook it to be the biggest EMEA float of the year. Other highlights included the US$2.12bn rights issue from Saudi hydrocarbon and petrochemicals company Petro Rabigh; the US$2bn IPO from Abu Dhabi plastics company Borouge; the US$1.8bn IPO from Abu Dhabi-headquartered fast food chain operator Americana Restaurants; and the US$1.36bn IPO from Saudi pharmacy company Nahdi Medical. Activity is spreading across the region, with deals in 2023 mooted from Kuwait, Qatar and Oman.Number one In the Middle East region, HSBC was the number one bookrunner in 2022, with its share of proceeds at US$4.36bn, followed by Citigroup (US$2.8bn), Saudi National Bank (US$2.5bn), Goldman Sachs (US$2.2bn) and EFG Hermes (US$2bn). Samer Deghaili, co-head of capital financing and investment banking coverage for the Middle East, North Africa and Turkey at HSBC, said the region’s strong post-pandemic economic recovery was one reason for the surge in deals but even more fundamental is that Saudi Arabia and the UAE have been advancing economic transformation plans that include efforts to deepen and diversify their stock exchanges. “They have been bringing prized assets to exchanges to improve diversification, to deepen the stock exchanges and to attract new pools of liquidity,” Deghaili said. “Saudi Arabia has always been busy in terms of equity capital markets; however, the scale and profile of the story has changed during the past few years, with the government more involved in bringing issuers to the market as part of its Vision 2030 [economic transformation] plan. We have also seen the Public Investment Fund, the country’s sovereign wealth fund, bring some of its portfolio companies to the exchange." He added that the US$29.4bn IPO of Saudi Aramco brought Saudi's Tadawul exchange to worldwide prominence in 2019. “It was the largest IPO ever done globally and that has put the Saudi exchange on the map in terms of attracting foreign pools of capital and proving its high standards,” he said. While A

Not many people would have had a liquidity crisis in pension funds threatening UK financial stability on their 2022 bingo cards. But that is what happened in the immediate aftermath of the UK’s then Chancellor of the Exchequer Kwasi Kwarteng delivering his “Growth Plan” to the House of Commons, promising the biggest package of tax cuts in 50 years. The pound dropped to its weakest point against the US dollar since the early 1970s, and 30-year Gilt yields, which had risen by 283bp over the previous three years, soared by 120bp in just three days. The result was a crisis for defined benefit pension schemes following liability driven investment strategies. Pension fund LDI strategies use derivatives as protection against adverse movements in interest rates and inflation and to release capital to invest in growth assets. But with Gilt prices dropping, funds suddenly had to cover margin calls on their derivative positions and had to sell most liquid assets – Gilts – to raise cash to do so. Mr Firesale meet Mr Vicious Cycle. The disastrous feedback loop only ended when the Bank of England stepped in. On September 28, it announced “temporary and targeted purchases of Gilts to help restore market functioning and reduce any risks from contagion to credit conditions”. Long-term yields plummeted. “It was an unprecedented time in the Gilt market,” said Adam Gillespie, a partner at XPS Pensions Group. “Yields moved more in a couple of hours than they had in a year. Within half an hour of the BoE announcing its first intervention, yields fell by about one percent.” The BoE later expanded the scope of its purchases to include index-linked Gilts.Non-bank leverage Some voices had been warning about the risks of LDI strategies, but the developments were so shocking because until that point they had worked as intended for decades. “Operationally, LDI strategies were set up to withstand short-term market movements greater than the worst ever seen,” said Alex Lindenberg, a managing director in Redington’s investment consulting team. And pension fund managers had until that point coped relatively easily with the uptick in inflation and interest rates over 2022. “Capital calls were being made as interest rates were going up, but trustees had plenty of time to make those calls and to ensure hedging remained in place,” said Gillespie. It was the speed and magnitude of market movements in September and October that far exceeded previous experience, forcing schemes already low on liquidity to sell liquid assets to fund margin calls. “If a pension scheme applies leverage to LDI, then this frees up additional capital to invest in growth assets. If this extra capital was excessively allocated to illiquid assets or private markets, this meant that there were fewer liquid assets available to raise cash for collateral,” said Jos North, an investment director at investment management company Ruffer. “What didn’t help was the correlation in the market; everything was going down in price at the same time. There were no buyers.” The sell-off led to speculation of significant losses, with Iain Clacher of Leeds University Business School, in a written submission to the Work and Pensions Committee, suggesting that “schemes can have seen the destruction of capital to the tune of around £500bn”. “I think it will take some time to find a true number on any losses,” said Gillespie.Cash and collateral What is clear, though, is that there will have been a range of outcomes at different pension funds. In particular those that had to clear their derivatives positions in cash will have been affected most dramatically. “It's critical to distinguish between institutions that would have used the cleared derivatives markets for their derivative strategies, and those using the bilateral OTC market,” said Simon Hotc

Calm seems to have returned to the market for UK government bonds after the turbulence induced by the short but catastrophic administration of Liz Truss that meant the UK was hours away from a meltdown in some of its major non-bank financial institutions. Indeed, Gilts are enjoying an unexpected purple patch after autumn's unprecedented volatility. But the return of an orderly market could well prove fleeting as huge supply looks set to increase risk again in 2023, meaning there could still be more trouble ahead as the market attempts to absorb the government’s huge funding requirement. The Office for Budget Responsibility's projections for UK gross funding have ballooned for the 2023–24 financial year from April to £305bn, double that of the previous year. Net Gilt supply – that is issuance by the Debt Management Office, fewer redemptions and the unwind of quantitative easing by the Bank of England – could easily be £250bn. “In the fiscal year ahead we expect to get an all-time record supply of Gilts, net of QE/QT. And it's likely to be a record number by a very long way," said David Parkinson, a sterling rates product manager at RBC. Which prompts an obvious question. "Who is actually going to buy all those Gilts and are we going to have to see higher long-term premiums, and new issue premium to sell the Gilts?" asked Paul Rayner, head of government bonds at Royal London Asset Management. Thus far, the BoE's intervention to restore order to a panicking Gilt market in the aftermath of September’s “Truss up” (to use one of the more polite terms Gilt market lags have for the now infamous "mini-budget") seems to have done the trick. Average daily traded volume was £11.35bn in September and the next month rose further to £12.1bn, according to Tradeweb data. The average for the previous six months had been £6.7bn. Levels haven’t returned to normal, but they’re not far away: average daily volumes for November fell to £8.48bn and declined to £7.59bn in December. Similarly, benchmark yields have moved a long way towards where they were (although they had already risen considerably even before the mini-budget debacle). The 10-year yield is down to 3.30% from the 4.63% high in early October, and it is a similar story for the two-year, which peaked at 4.70% but is now around 3.40%. At the long-end, the 30-year is hovering around 3.70% from a lofty 5.10%.Bouncing back That retracement of yields combined with the fact that the DMO's sales in the first quarter both by auction and syndication have been well received gives some comfort that the market has bounced back and long-term scarring will not be too great. But there are reasons for caution. First, net Gilt supply has actually been relatively light so far this year, amid substantial redemptions. And second, the bond market rally has mostly been a global one, apparently caught short by falling inflationary expectations. So what if inflation significantly overshoots? Any market correction in optimistic views on where central banks' rates will terminate would be sharp in Gilts. "There is a widespread view that there isn't much premium left in the UK market compared to immediately after the LDI crisis but I'm not sure that is totally accurate," said Mike Riddell, a senior portfolio manager at Allianz Global Investors. He points out, for example, that high coupon Gilts are yielding more than low coupon Gilts – for the same maturity. And those high coupon Gilts were largely held by a specific class of pension funds – those following liability-driven investment strategies – that were at the centre of September’s storm as they were forced to sell Gilts to fund massive margin calls. "The footprint of distress is still there," he said. David Zahn, head of European fixed income at Franklin Templeton, expects more volatility, for bond markets more generally but also Gilts i

Financiers led by HSBC chief executive Noel Quinn put on a united front in November when Hong Kong hosted the Global Financial Leaders Summit. Timed to coincide with the resumption of the Hong Kong Sevens rugby tournament after a two-year coronavirus-induced hiatus, the conference was designed to herald a return to business as usual. "We have to help Hong Kong through this next phase of post-pandemic restrictions and continued economic growth to strengthen the confidence of Hong Kong as an international financial centre,” Quinn told the conference. Quinn has more motivation than most to seek a return to normality as the bank he runs stands as a symbol for the challenges facing Hong Kong. As an international bank deriving the bulk of its profits from the Asia-Pacific region, its future is under threat from rising Sino-US tensions and the challenges of the pandemic. During Covid, the UK regulator banned HSBC from paying a dividend in return for financial support, a move that angered the bank’s retail investors and has thrust the bank into a fight with its biggest shareholder, Ping An Insurance, which is calling for a break-up. HSBC has rebuffed the calls, arguing that its strength lies in acting as a crucial bridge between East and West. It’s hard not to draw a parallel between HSBC’s travails and Hong Kong’s shifting status from being an international financial centre to one more dependent on China than ever before. “Since 2015, Hong Kong’s capital markets activity has become highly concentrated around mainland China,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis in Hong Kong. “Hong Kong used to be a real global offshore centre. You would have foreign companies listing or using US dollar bonds. All of that business disappeared because onshore [Chinese] companies needed Hong Kong to expand overseas. So because of that concentration, it’s hard for Hong Kong to maintain a balanced profile as a global offshore centre.” Benjamin Quinlan, CEO and managing partner of Hong Kong-based consulting firm Quinlan Associates, takes a similar view. “Hong Kong has run a dual narrative for a long time. Partly it’s an international financial centre and partly it’s part of the Greater Bay Area [the cities of the Pearl River delta]. It’s a difficult approach to straddle both and the two often don’t coalesce with each other,” he said.Price to pay Putting so many of its eggs in the China basket paid off for much of that period, but there was a price to pay once the pandemic began, with both China and Hong Kong putting in place severe restrictions, both in terms of people’s daily activities and their ability to travel. Deal volumes were also affected by China’s property crisis, its dispute with the US (and the move to delist companies from US exchanges) and its efforts to get what some saw as over-mighty tech companies to toe the line. Take Hong Kong’s equity capital market, where Chinese companies dominate issuance. Hong Kong IPO volumes shrank 70% in 2022, even as mainland equity offerings remained healthy. One result of that collapse in deal volumes linked to mainland China is that banks moved to diversify their revenue streams, building out businesses across the smaller and more fragmented markets of Southeast Asia, using Singapore as a hub. That dynamic was accentuated by a security crackdown in Hong Kong at the behest of Chinese authorities in the aftermath of widespread protests in 2019 and 2020 against China’s National Security Law being introduced in Hong Kong. As a result, over the last couple of years, rather than Hong Kong being a magnet for banking talent, it became a place to avoid as tough Covid restrictions and (to some extent) disillusionment with the political situation prompted senior expat bankers to return home, retire or relocate to Singapore and Dubai where they were free to tra

Japan made waves in the green finance world with its announcement in May that it would issue ¥20trn (US$157bn) of bond instruments to finance its transition efforts. There was just a little hiccup with the yet-to-be-ratified grand plan: the financing instrument of choice is transition bonds. This is a vaguely defined category of fixed-income instruments to help companies move to renewable energy sources. This softly-softly approach is perhaps not surprising, given that coal and natural gas still fuel 68% of electricity generation in Japan, making the country one of the largest global economies still heavily reliant on fossil fuels. But the approach has led to criticism. Among those questioning Japan’s plan is the Asia Investor Group on Climate Change, which represents US$39trn in assets under management from investors across 11 Asian markets, with over 65 investor members. Anjali Viswamohanan, director for policy at AIGCC, said Japan – and several other countries in Asia – are attempting to align sustainable finance frameworks with their national priorities rather than with recommended mitigation pathways to achieve the 1.5-degree target as recommended by bodies such as the Intergovernmental Panel on Climate Change. “It is important that they aim to be credible structures that are aligned with international benchmarks to help ease investors’ decision-making process relating to climate investments,” Viswamohanan said. ESG financing specialists worry that focusing on transition bonds will simply allow Japan too much wiggle room and that a genuine transition will be too slow. There is, though, some pushback on the view that Japan is not taking green finance seriously. “Japan does not focus only on transition finance instead of green finance,” said Sachie Ii, sustainability chief strategist at Mizuho. “Japan continues to emphasise green finance. On the other hand, high-emission companies often have low green assets. But that doesn’t mean that they’re not doing carbon-reduction activity. They’re actually doing it in a painstaking way. And while the target projects' [for transition finance deals] current emissions might be high in the transition period, after that the amount of reduction in the CO2 emission will be much higher.” Japan certainly has some geopolitical cover for its stance. The November 2022 G20 meeting recognised “the need to take actions to enable transition finance to support orderly, just and affordable transitions towards a low-greenhouse gas emissions and climate-resilient economy”, according to a G20 joint statement.Cornered market With ¥150trn of combined private and public investment needed for Japan to become a carbon-neutral society, the government has doubled down on its strategy, planning to issue sovereign yen bonds as transition instruments rather than the more widely recognised format of green bonds. The transition bond label has faced resistance elsewhere, and some deals already priced have raised concerns because they financed gas projects instead of renewables. Sustainable Fitch said in a November report that the transition finance label was problematic due to confusion around its applications. Nneka Chike-Obi, head of Asia-Pacific ESG research at Sustainable Fitch, said in the report that, in the agency’s own research, the term “transition” referred to activities that reduce greenhouse gas emissions, particularly from hard-to-abate sectors, in alignment with the goals of the Paris Agreement. Others, like the International Capital Market Association, have rejected the standalone use of the term, urging issuers to align with either a use-of-proceeds instrument under the categories of green, social or sustainable bonds, or to issue sustainability-linked bonds tied to transition targets. However they are defined, Japan has been the largest issuer of transition bonds. Indeed, all transition