No need to press panic buttons in 2019
With the UK punch drunk from Brexit implosion, cool heads are required but ultimately liquidity is still available at a price, as realism returns to market pricing structures
Capital markets got off to a palpably nervous and tentative start in the first week of the year, albeit a week where the London market felt like it was still in quasi-holiday mode as many desks were still operating skeleton crews ahead of the fuller return to the fray in the week of January 7. But there's certainly no need to panic.
Equity capital markets didn't print anything in any region, while international bond markets were, let's just say, a little testing. Mind you, with the stock market rout we've seen in recent weeks – neatly encapsulated by the 39% collapse in Apple Inc stock between the 52-week intraday high reached on October 3 and this past Thursday Jan 3 – that's no surprise.
If the name of the game in primary capital-raising throughout 2018 – especially in credit markets – had been one of working the windows with a degree of caution and opportunism around timing and pricing, the song remains the same in 2019. If not more so.
No new macro or micro themes emerged over the holiday period. In the UK, the rather fragile mood is set to turn potentially more fractious as people returning from their holiday break run headlong into lawmakers restarting the Brexit debate in Parliament ahead of a vote expected in the week of January 14. That should keep a lid on any unexpected market exuberance.
I loved the Reuters story that said Prime Minister Theresa May had to win the vote in parliament to get her Brexit deal approved "or risk seeing Britain's exit from the European Union descend into chaos". That ship has, alas, long set sail amid talk of the UK crashing out of the EU without a deal, of the UK holding a second referendum, or rescinding its decision to leave altogether. Like many people, I'm now zoning out of the stories – scare stories or not – about how Brexit might affect banking, capital and financial markets, the UK economy, the European economy or anything else for that matter.
I'm also fed up with people telling me that markets dislike uncertainty. You know what? It's the opposite. Markets have been dealing with daily uncertainty ever since markets began. Uncertainty is why there are markets in the first place. At the end of the day, Brexit, Italy, Donald Trump, the US government shutdown, US-China trade, geopolitics, EM weakness, global monetary policy, jobs, inflation and growth are all so much hot air.
Everyone will have a view on whether they believe markets should go up, down or sideways as a result of the white noise of the world in action. My view is that given the dazzlingly meteoric rise in equity prices we've witnessed and the zero interest rates (ZIRP)/negative interest rates (NIRP) we've lived through for years and the asset-price bubble we've blown, we have long been due some give-back, even if it's felt a little disorderly and violent at times. I'm not a buyer of Armageddon scenarios.
Issuers that ventured into the primary credit market in the first week of the year did fine. There were no disasters. Some borrowers struggled; some fared better than others, but wasn't it ever so? With the tough backdrop we've got, new-issue bankers testing the limits of price and demand elasticity as issuers and investors try to figure out where they're comfortable was never going to result in slam-dunk execution.
As yields have gradually risen and credit spreads widened on the back of market technicalities and as the shoe shifts from sellers to buyers of debt (with the ECB a much less fervent buyer), getting the fix on new-issue pricing will be an art as much as ever. Participants sitting at both ends of the bond market – issuers and investors – will always play a bit of cat-and-mouse to gain advantage, but syndicate bankers today talk of a sense of realism around pricing and the new-issue process.
Book coverage ratios have been on the decline since 2016. What we saw as 2018 progressed and what we've seen in the tentative first few days of 2019 is that the market doesn't need books multiple times covered.
What the market does need at times like these is as much transparency, level-headedness and realism as market constituents can muster: from issuers around what they really want to achieve; from investors around whether and how they really want to engage; from underwriters a properly thought-through interpretation of the variables and less dancing around messaging about pricing indications and guidance and a more direct gauge of what they have to do to get deals into the right hands and over the line.
Where will 2019 deal volumes end up? Who knows? Perusing the capital markets data, 2018 held up relatively well. Volumes were off year-on-year (global DCM -8%YoY at USD6.6 trillion), but against a record-breaking 2017 and in light of all of the roadblocks that emerged during the past year, it could have been worse. (Asian G3 volumes, incidentally, were off 2017's record showing, but 2018 was still the second-best year. Ever. Ditto Asian local currency bond issuance volumes.)
Thinking about what's confronting the markets today, I was taken with recent comments from a senior European bond originator, who told me: "there's no need to panic. Liquidity for new deals will be there but it'll be there at a price".
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11 Jan 2019