LEX CAPITIS – June 2020

Jun 15, 2020 | Articles, Global Markets Update

Kuan Yu Oh
Managing Director, Co-Head of Corporate Advisory
Mobile: +852 6971-7989
Email: kuanyu.oh@odysseycapital-group.com

Notice

This publication is for informational purposes only and does not address the circumstances of any particular individual or entity. It does not constitute financial advice and should not be used as such. You should seek a duly licensed professional for financial advice. For more information about please see our Disclaimer.

Market Update: June 2020

Jun 10, 2020 | Articles, Global Markets Update

Market View – The Old Normal

Our caution last month proved to be unfounded. The power of the unprecedented stimulus, zero interest rates and the prospect of loosening of lockdown restrictions won the battle against extreme lows in economic activity and the prospect of worst economic data to come. As a result, the World MSCI Index is up 14% since mid-April, and up a whopping 43% since the March trough. The Index now sits at only 6% below the pre-COVID peak. Virtually all risk assets moved up in tandem, including credit. Even oil staged a big rally, rising to USD38 per barrel. The confirmation that the market hadn’t lost all sense occurred last Friday when US unemployment fell to 13.3%, a 1.4% decline from the April figure. This was a particularly large positive shock since some commentators were fearing a number closer to 20%. The other shoe has yet to fall, and those that are waiting, may be in for a long wait. Last week the US interest rate curve steepened 15-25bp for 5-10Y.

Despite market movements, the world is not yet back to normal. The trend in new COVID infections globally is actually still rising. However, the regions that concern the financial markets, namely US and Europe, there the trend is falling, even if the fall is stubbornly slow. Significant restrictions still apply in most countries. The daily new cases in the US still number approximately 19,000, a large quantum.

Source: JHU CSSE

Act 4 in a 5 Act Play

We are now in the 4th Act of the expected 5 Act COVID play for equity markets. The Acts can be characterised as:

Act 1: 3rd week of February. Stocks and other risk assets begin to sell off indiscriminately. The culmination of the first Act was the implementation of the lockdown and social distancing that resulted in the market trough on the 23rd of March.

Act 2: Last week of March. The market realized that there were beneficiaries to the austere policies and we witnessed share prices for online businesses start to surge.

Act 3: 1st week of April. Interest swung to quality businesses that were not beneficiaries of the policies but were partly resistant to the situation and would survive largely intact.

Act 4: Mid-May. The 2nd week of May was when Europe began to loosen lockdown restrictions. By mid-May investors started to support stocks that were heavily affected by COVID policies but were likely to survive as long as the end of the policies remained highly visible. This includes the Banks and Industrial sectors.

Act 5: 3rd – 4th week June? Equity markets to recover their previous peak? Currently, the MSCI World Index is 6% below the pre-COVID peak.

While we have yet to see how Act 5 develops, or whether there is a surprise Act 6 or 7, we find it incredible that it may be possible that in just 4 short months that the equity markets could have plummeted as well as recovered during a time when we are witnessing some of the worst economic data the world has seen since the Great Depression. Indeed, the Global Credit Index (USD corporate bonds) is already up 2% YTD.

Room Left in Laggard Play

While much of the low hanging fruit was picked last week in terms of the under-performing Banks and Industrials, we believe there is still value in the laggard play. Value has been beating Growth in recent weeks, and while this may be a temporary blip to the 10-year Growth out-performance, participating in trend reversals can add meaningfully to performance.

We note that Banks remain 27% below the S&P 500’s peak on the 19th February, compared to Consumer Discretionary, Information Technology, and Healthcare, the sectors that have already regained their previous peaks. Because we are mid-cycle in the laggard recovery, we expect there to be some volatility, but as the global economy slowly climbs out of lockdown, we expect the laggard plays to continue to play catch-up. In Industrials, travel related stocks such as airlines and cruise ships, surged last week. This is likely to remain a highly volatile sub-sector but and may represent a highly sensitive play to the loosening of lockdown restrictions.

Figure 2: Performance of S&P 500 Sectors Since pre-COVID Peak           Source:  Bloomberg

If you like to receive more information on our portfolios solutions, please contact us here: info@odysseycapital-group.com

LEX CAPITIS

May 15, 2020 | Articles, Global Markets Update

Lex Capitis Odyssey Corporate Advisory’s periodical that highlights capital and financial markets developments and its potential implications for you and your business.

Odyssey Corporate Advisory is an independent boutique consultant providing business advisory, investment consultancy, project management and coordination services for companies that intend to access the Hong Kong capital markets.

Searching for Diamonds in the Rough

Source: Bloomberg, Odyssey Capital 

Summary:

• IPOs of Singapore and Malaysia companies during the two months of 2020 have outperformed the market;
  

• The price-performance of IPOs with cornerstone investors, on average, performed better than IPOs that did not have cornerstone investors during this period. However, stock-specific factors in each IPO were the key determinant in price performance;
  

• Size matters, on average, during this period as IPO with a market capitalisation that is greater than HK$1 billion performed, on average, better than IPOs market capitalisation less than HK$500 million. However, stock-specific factors in each IPO drove the disparity in price performance.
  

IPOs during January and February 2020 

During the first two months of 2020, 24 companies listed on the Stock Exchange of Hong Kong. 22 companies were listed on the Main Board and two companies on GEM. There was no one particular industry that dominated, with companies ranging from the construction to television industries. Four IPOs (Wenye Group, Wah Wo Holdings, Jiachen Holdings and China Hongguang Holdings) were undersubscribed in their placing offer and one IPO (HuiJing Holdings) was undersubscribed on the public offer.

Figure 1: Average IPO returns
Source: Bloomberg

Given the current market environment, we examined the stock-specific returns from their IPO date to 29 April 2020 by adjusting each IPO’s price-performance by the price return of the Hang Seng Composite Small Cap Index (“HSSI”). The HSSI is the appropriate market proxy because the IPO market capitalisation of the companies during this period ranged HK$500 million to HK$10,140 million which is within the scope of HSSI’s constituents market capitalisation. Contrary to an earlier media report about the unattractiveness of South-East Asian companies listing in Hong Kong, investors would, on average, have benefitted from investing Malaysian and Singaporean companies that IPO during this period.

Time to Listing 

Figure 2: Timing from application to allotment of Shares
Source: Odyssey Capital 

There was no change in the time required for the listing process, the average time from submission of the IPO application until the allotment of shares took more than six months, i.e. it required at least one renewal of the IPO application. The IPO that took the longest was almost a year whilst the shortest took just under four months. There was no discernible difference in the time required between main board applications and GEM board applications.

Size Matters? 

Figure  3: Large IPOs
Source: Bloomberg

Figure 4: Small IPOs
Source: Bloomberg

Although on average, IPOs with a market capitalisation greater than HK$1,000 million performed better than IPOs with a market capitalisation less than HK$1,000 million, there was a wide disparity in price-performance between IPOs. Compared to LVJI Technology Holdings and Activation Group Holdings, 12 small IPOs had smaller negative returns. CTR Holdings and Kwan Yong Holdings had better returns compared to Huijing Holdings which was the largest IPO for the period.

Odyssey Corporate Advisory is a boutique corporate advisor providing independent and impartial investment and capital markets consulting services catered for your circumstances and preferences. Corporate Advisory is a division of Odyssey Asset Management Ltd, a Type 1, 4 and 9 SFC licensed company and subsidiary of the Odyssey Group. If you have any enquiries, please contact:

Kuan Yu Oh
Managing Director, Co-Head of Corporate Advisory
Mobile: +852 6971-7989
Email: kuanyu.oh@odysseycapital-group.com

Notice

This publication is for informational purposes only and does not address the circumstances of any particular individual or entity. It does not constitute financial advice and should not be used as such. You should seek a duly licensed professional for financial advice. For more information about please see our Disclaimer.