After a year of unpleasant surprises, equity markets were given an early Christmas present last week with US inflation data coming below estimates. Investors are now clamouring for ECM deals to take advantage of a change in market tone, bankers say.
On Thursday (10 November) US CPI came below forecasts, at 7.7% for October, prompting speculation that the US Federal Reserve could slow interest rate rises. Equity markets soared, with the S&P 500 and Nasdaq 100 rocketing on the day and ending the week 9.4% and 6.5% higher than they had been before CPI numbers.
European stocks were also huge beneficiaries, with the Stoxx 600 jumping 2.5% after the CPI numbers into market close and gaining further on Friday, 11 November.
As large liquidity events, ECM deals give investors access to a greater quantum of stock in single companies than they could get in trading. Investors are eyeing the greater opportunity for outsized returns, especially in the blocks market where deals are sold at a discount, bankers say.
“It was one of the busiest Fridays I’ve had in a very long time,” said one ECM syndicate banker talking about the volume of buyside calls made to the desk the day after the CPI numbers.
The fourth quarter tends to be a busy period for equity capital markets in EMEA, with the last of the year’s issuance activity before investors shut shop for the festive season. But by mid-November, the end is usually in sight, with the US Thanksgiving holiday often seen as a soft end to the year.
That was the talk among syndicate desks before the US CPI numbers, and the original theme of this week’s ECM Pulse: the upcoming last two-week rush before deal flow is halted.
Activity had already picked up with USD 4bn of ECM issuance last week, the busiest of Q4 so far, according to Dealogic. But the tone has changed substantially from banks being able to do whatever they can to get deals out the door to one of buyers almost bashing their doors down. The most prominent deals last week included block trades in Irish bank AIB [IDEN:AIB] and the Saudi stock exchange Tadawul [ TADAWUL:1111 alongside a convertible bond and concurrent delta placement in Ubisoft [EPA:UBI].
“Investors have had a really difficult year and in a way what we now have is the opposite to a normal year, where people want to shut up shop,” said a second ECM banker. “People want to buy into this positive move, and many want to stay open longer now.”
Investors have contacted syndicate desks across the street with a list of single stocks they want to buy, often with indication of size, in case any opportunity should arise before year-end.
Bankers will use this to pitch deal opportunities to issuers.
A third ECM banker said he is seeing a definitive uptick in interest from investors, but that several issuers were still reluctant to sell down when reference prices are still well below where many want to trade.
While many may be reluctant, investor appetite is undoubtedly at its strongest level for accelerated transactions this year after the largest one day move in US indices since April 2020, the start of the exuberant bull market spurred on by central bank policy to fight the economic effects of Covid-19.
“I suspect that this week and next will be very busy, for both primary share sales and secondary sell-downs, there won’t be a sector theme I think we will see everything and anything,” an investor said.
Recent and upcoming lock-up expires tracked by this news service include ones in Swedish crisis management solutions specialist 4C Group [STO:4C] on 19 November, Mediterranean oil and gas company Energean [LON: ENOG] which expired on 22 October and Glencore [LON:GLEN] which expired on 20 September.
But the investor added that deals which might come to market may not be determined by lock-ups with many sellers likely having sat on a sideline for some time waiting for a window.
Don’t get stuck
Investors have been nervously looking at markets all year not just concerned about downside risk but also about potentially missing a bounce, as many did in the depths of the pandemic in 2020, several sources said.
All the bankers speaking to the ECM Pulse in the wake of the CPI data said that investors are now desperate to bank some positive alpha.
“It is one thing having a bad year because the market is not there and another to have one because you missed a positive moment; there is a concern of not seeing that opportunity,” the second banker said.
The investor said that the buysiders knew they were susceptible to being caught in a bear market squeeze given most were positioned for bad economic news well into next year and would now be scrambling to put money to work, particularly hedge funds.
Several bankers confirmed that most of the inbound interest for accelerated deals has been from hedge funds rather than long-onlies, although institutional investors are still expected to take part in the deal rush before the end of the year.
Liquidity will be the most important characteristic for deals brought to market before the end of the yea, the investor and the bankers agreed.
“We are so close to the end of the year you have to be able to get out of a position if you need to,” the investor said adding that everyone would be careful not to add more losses onto a painful 2022.
While investors will be somewhat cautious, they can’t afford to miss out if markets have truly turned. So, for now at least, tis the season to be bullish.
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