Euro zone holds key to recovery

PUBLISHED : Friday, 15 June, 2012, 12:00am
UPDATED : Friday, 15 June, 2012, 12:00am


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Hong Kong Exchanges and Clearing (HKEx), the holding company of the city's stock exchange, is facing challenging times in the coming months. A slew of negative economic factors, external and internal, have led to several firms either cancelling their listing plans or taking a wait-and-see attitude.

Will the second half of the year bring a positive tide or will the headwinds continue to lash the exchange as they did in the summer of last year? Financial analysts are divided in their opinions, but they all believe the recovery will remain anaemic if there is no resolution to the euro-zone debt crisis.

The euro zone has been lurching from one crisis to another and Greece, in the centre of the storm, has slipped into a deep abyss, affecting equity markets around the world. Analysts and strategists had already warned that, after a positive start to the year, the second half would test investors' resolve to hold on to their investments or to sell off everything at one go. Recent jobs data from the United States has also not been encouraging.

With all the doom and gloom lingering over equity markets, it's not surprising that several companies looking to list in Hong Kong are taking a second look at their options, while some have already withdrawn their applications.

The most high-profile company to withdraw was London-based jeweller Graff Diamonds. It was expected to raise US$1 billion, but volatile market conditions meant it put its listing plan on ice, making it the biggest initial public offering (IPO) to be shelved this year.

Graff management blamed adverse market conditions and 'consistently declining stock markets'. Adding to the uncertain environment was the fiasco surrounding Facebook's IPO last month that further spooked IT and software firms wanting to list.

Hong Kong has seen 21 IPO listings worth US$1.4 billion this year, down 85 per cent from the same period last year when 25 IPOs brought in US$9.1 billion, according to data provided by Thomson Reuters

In Asia, 46 IPO deals worth US$7.7 billion have been completed this year, up one-third from US$5.8 billion from the same period last year. These included two major Hong Kong listings - the HK$2.44 billion listing of copper producer China Nonferrous Mining and the HK$3.37 billion listing of China Yongda, the second-largest trader of luxury cars, such as Audi and BMW, in the mainland's eastern provinces. Last year, Hong Kong was the top market globally for IPOs, with some high-profile international and local companies listing on HKEx. They included Prada, Citic Securities, Chow Tai Fook Jewellery Group and New China Life Insurance. Chow Tai Fook raised US$2.8 billion in the biggest listing of last year.

Andrew Lam, assurance director at accounting firm BDO, says his firm had projected a reduced IPO pipeline in the second and third quarters of this year. Lam expects Hong Kong to have 80 listings this year worth HK$200 billion, compared with 76 listings last year.

Lam says several overseas listed mainland companies may mull a secondary listing in Hong Kong, boosting the listing pipeline in the city. He suggested that the Hong Kong bourse was well prepared to face competition from regional stock exchanges such as Singapore and Shanghai as most of the mainland firms planning to raise capital overseas still preferred Hong Kong over Singapore.

While sentiment for IPOs is still weak, Lam expects listing activity to pick up in the second half of the year, especially as the mainland authorities launch pump-priming measures to boost the economy and relax some measures launched last year at the height of the property and construction boom.

Edmond Chan, a partner in the capital market services group at PricewaterhouseCoopers, says Hong Kong, as an international capital market city, is bound to be affected by external factors that have sent the global equity market reeling in the past few weeks.

'It is looking quite uncertain at the moment, which may further depress the environment for IPOs to pick up. It all depends on factors such as a strong recovery in the United States market and pump-priming measures by the central government to push up the mainland economy.'

Edward Au, national co-leader of the public offering group at Deloitte China, says Hong Kong market sentiment is particularly weak against the backdrop of the deterioration of the European debt crisis, slowdown of the mainland economy and the uncertainties in future policies brought by the upcoming presidential election in the US, the world's largest economy.

'Without any economy stimulus plans from key countries, the IPO market is expected to be continuously challenging in the second half of the year,' Au says.

On competition from other regional bourses, Au says HKEx has to diversify its products to stay ahead of the game, including different types of renminbi products to enhance Hong Kong's role as an offshore yuan centre. 'It may be beneficial to Hong Kong to develop a bond-listing market, the area where Singapore is taking the lead in the region. Given the number of yuan-denominated bonds issued in Hong Kong, it may also be sensible to develop the market and enhance its liquidity for the overall good of the yuan pool in the city, strengthening Hong Kong's position as an offshore yuan centre and enhancing the pace of RMB internationalisation,' Au says

Some analysts point out that HKEx's main board was trading at 8.66 times its price-to-earnings ratio last week, compared with 11.27 times at the end of February when the Hang Seng Index peaked at 21,680.08. The market has suffered a double impact from the euro-zone crisis and from a slowdown in the mainland economy, the world's second-biggest economy.

Some strategists are of the opinion that a few companies who cancelled their IPOs may have a rethink in the second half and cut their fund-raising targets. Graff is one example, with one analyst saying that the jeweller would slash its target by at least 10 per cent when it revived the listing to reflect sentiment in the market.