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Year-end data shows near-record issuance volumes in the Euro
sector during 2019, a sharp decline in the stock of negative
yielding debt since August, but a relatively disappointing year for
IPO sales despite sizeable stock-market gains in 2019.
Developed-market debt
A Financial Times report on 23 December noted that the global
stock of negative yielding debt has declined to USD11 trillion.
After the recent bond market sell-off, this total now stands
USD6 trillion below its summer peak.
From a late August low of -0.41%, France's 10-year OAT stood at
a positive yield of 0.1% on 30 December.
Germany's 10-year Bund, which entered negative territory in
June to achieve a record low yield of -0.74%, stood at -0.20% on
the same day.
Its 30-year bond stood at +0.33% versus -0.28% in mid-August
2019.
On 2 January, Austria's 10 year bond also moved into positive
territory
Also on 23 December, a Reuters report using Dealogic data noted
that US investment grade corporate issuance denominated in Euros
had reached EUR93 billion in 2019, four times its 2018 level and
roughly 50% above its prior 2016 peak:
US borrowers represented 27% of such sales.
The growth is attributed to low rates in the segment - where
average yields stand at 0.48%, versus 1.25% at the start of 2019,
the availability of long-duration demand (US issuers accounted for
half the 30-year corporate debt sales according to Refinitiv data),
and the attractiveness of US supply to investors.
The latter reflects that US issuers are not eligible for ECB
purchase and thus offer a yield premium of up to 25 basis
points.
An earlier report by Global Capital on 18 December reported
that for the wider North American region, total issuance had
reached EUR198 billion in 2019, versus EUR156 billion in 2016 as
the prior high-point.
The same source reported that - using Dealogic data - total
Euro-denominated issuance spanning the public, financial and
corporate sectors had reached EUR1.381 trillion by 18 December,
versus the EUR1.389 trillion full-year record achieved in 2006.
Within extremely light, seasonally-affected supply, the German
state of Lower Saxony announced on 30 December that it had
appointed banks for a EUR1 billion 10-year deal, which it duly
launched on 2 January.
Emerging markets
According to IFR, Laos has closed 2019 with a USD150 million
18-month issue at 8.5%.
In early October it had raised THB14 billion (USD464.2 million)
in the Thai domestic capital market, with the placement of three,
five, seven, 10, 12 and 15-year tranches with coupons from 3.65% to
6.05%.
Just over half (THB7.2 billion) the Thai-targeted sale was
allocated to infrastructure development with the remainder applied
to redeeming an existing bond (THB1.8 billion) and loans, according
to an involved banker cited by The Nation Thailand.
According to a Nasdaq report in November, the new dollar sale
is the first by Laos to target international buyers: a prior dollar
sale in 2015 was targeted to Thai buyers.
Banco Pichincha, Ecuador's largest bank by assets (with a 26%
share), has become the country's first green bond issuer, with a
USD150 million sale.
This was placed with three official buyers, IFR, IADB and
Proparco, part of France's AFD.
IADB assisted in designing the bond, which will target projects
in renewable energy, transport, waste management and
construction.
Equity
On 30 December 2019, using Dealogic data, the Financial Times
noted that despite the strong performance of equity markets in late
2019, the number of IPOs fell globally to 1237, roughly a 20%
decline and the lowest level for three years.
The total volume raised fell less sharply, dropping 10% to
USD188.8 billion. This outcome was significantly boosted by the
record sale by Saudi Aramco.
In Europe and MENA, the total of 179 deals was the lowest in
seven years and 40% below 2018 levels.
Deal numbers also fell in Asia and the US, with the former at a
five-year low.
Despite the often-cautious primary market conditions global
stock market performance in 2019 was strongly positive. The FT's
All-World index ended the year up 23.8%, its best gain since 2009,
the MSCI Emerging Markets index rose 15.89%, and the Dow Jones
index recorded gains of 22%, while the S+P 500 index showed gains
of 28.9%. Although European growth prospects have been a focal area
of concern, the EuroStoxx 50, CAC 40 and Dax indices all gained
around 25% in 2019, while Italy's FTSE Mib index recovered almost
29%. Within the larger European indices, Spain's Ibex 35 was a
relative laggard, with gains of 11.82%.
Implications and outlook
It is unsurprising that 2019 Euro-denominated bond issuance
volumes were at or around record levels, with
substantially-increased and record US supply, given the ECB-fueled
historically low interest rate environment in 2019.
We have flagged repeatedly that prevailing interest rates give
borrowers strong incentives to refinance existing debt to lower
borrowing costs and lock in historically-low rates for extended
terms if available. This process is likely to continue in
2020.
The growth in Euro-denominated issuance by US firms also
appears a natural response to the favorable issuance conditions
available in the sector, combined with a logical desire to
diversify funding sources.
Bank of America research forecasts that this trend is likely to
continue, suggesting the US share in the ICE/BOA Eurozone corporate
debt index will rise to 20.8% by 2020 from the current 18%. It
suggests that firms such as Amazon and Visa which have revenue
streams in Euros could debut in the sector within 2020.
The recent rise in rates and reduction in the negative-yielding
debt stock reflects the more constructive environment for global
growth. Key positive factors have been multiple indicators of an
easing in US/China trade conflicts, and signs that the European
economy could start to improve during 2020. This has led IHS
Markit's Economists to include the possibility of a late 2020 US
rate increase within our key forecasts for 2020.
Despite the impressive 2019 issuance volumes, investors who
committed new funds to Euro-denominated debt investments during the
third quarter face significant mark-to-market losses, especially on
long-dated negative yielding bonds bought at the time. This
salutary lesson may limit appetite for negative yielding debt,
especially for very long terms, during 2020.
With the ECB expected to maintain its expansionary stance in
2020, while the Federal Reserve could move towards tightening in
late 2020, the search for yield in the Euro-denominated sector is
likely to benefit corporate, sub-investment grade and emerging
market debt. These areas offer the benefits of generally-positive
yields, with the latter offering relatively sizeable returns for
longer dated instruments.
Given the recent market selloff and lower levels of expertise
in the latter, riskier categories, expansion in these areas is
likely to be finite in scale (rather than a headlong rush for
yield), but the Euro-denominated market could well take a higher
share of global issuance in these areas during 2020.
Equity performance was volatile for much of 2019, making the
reversal in IPO numbers unsurprising.
For much of the year, stock market sales were hindered by
perceptions of slowing growth, exacerbated by major global trade
uncertainties, and by growing concerns over the often-ambitious
valuation models used by companies offering new technologies.
These concerns have eased in late 2019, and further improvement
in indicators for economic performance should be helpful in
sustaining the more favorable stock market climate prevailing in
the last quarter of 2019.
However, as indicated by heated public debate over the
valuations for several major IPOs - notably the failed deal for
WeWork - investor caution over valuations appears well-entrenched
heading into 2020. While this makes new share sales harder, this is
also more likely to increase market stability and reduce the risk
of speculative excess.
Higher valuations are likely to encourage supply in 2020. In
this regard the favorable reception for larger deals in the fourth
quarter provides a more encouraging background for new supply.
Posted 02 January 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit