Corporate Asia can no longer raid global stock markets for cheap and easy capital, just when they need it most
- The stock market crash has ended Asian companies’ access to cheap capital financing, exposing their long-nurtured dependence on capital markets, just as their need for financing is acute, and likely to come at much greater cost than before
Asian companies have long been seen as dependent more upon bank loans or finance from controlling families than on public markets. But this has changed and as the OECD pointed out, they are now “the world’s largest users of public equity financing”.
Apart from China, companies from India, South Korea and Hong Kong have become “globally important users of public equity markets”. Emerging markets such as Vietnam, Thailand, Indonesia and Malaysia also rank higher than most advanced capital markets in this regard.
Plunging stock prices are bad news for portfolio investors, whether major financial institutions or individuals, and the dramatic falls seen lately in stock indices have been frightening. But the potential rise this implies in the cost of access to equity capital is less obvious.
The higher stock prices are, the fewer the number of shares that need to be issued to raise a given sum of money, and the lower the overall cost of paying dividends on those shares. Conversely, the lower stock prices fall, the greater the cost of issuing equity becomes.
This might not matter in normal times but the present is anything but. According to S&P Global, US stocks have plunged by 24 per cent this year while British stocks are off 28 per cent, and European stocks 27 per cent. In Asia the overall drop is around 20 per cent, but much more dramatic for members of the Association of Southeast Asian Nations.
Over the five years to 2018, Asian companies have collectively raised about US$80 billion annually on local stock markets, chiefly in the form of IPOs.
However, from 2013-2017, Asian companies also tripled their use of secondary market share offerings compared to the first five years of the 2000s.
Why China’s role as an investor safe haven is exaggerated
As the OECD noted in its 2019 Asian Equity Markets Review: “An important feature of public equity markets is that already listed companies can turn to the market for a secondary offering when they need more equity capital, for example, to undertake new investments or to bridge a crisis.”
That option may not be open to them, however, in the wake of the recent crash in stock markets around the world. At very least, tapping equity markets for bridging finance or investment capital will come at a higher cost than it has during the long years of the late lamented equity bull market.
In such a bull market, it was relatively easy and cheap for firms to raise new capital, which means the Asian corporate sector has been living off a diet of cheap equity capital and low interest rate-fuelled cheap debt in recent years. That golden age has come to an end, at least for now.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
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