Asia's Wall Street gloom lifts. Maybe

The Pak Banker - - OPINION - Nisha Gopalan

IN­VEST­MENT banks in Asia have been en­gulfed in the gloom sur­round­ing job cuts in Wall Street trad­ing floors. There are some green shoots emerg­ing; things just won't be as good as last year. De­spite some early signs of a re­vival in stock mar­kets, this is is likely to be a tough year for trad­ing and in­vest­ment bank­ing world­wide, as firms grap­ple with record-low in­ter­est rates, plung­ing en­ergy costs and cool­ing emerg­ing­mar­ket growth. Cit­i­group CFO John Gerspach's warn­ing that first-quar­ter rev­enue from fixed in­come and equity trad­ing could fall 15 per­cent (in­vest­ment bank­ing fees are fore­cast to tum­ble 25 per­cent) slammed bank stocks that had re­cently been on the up.

Asia has to deal with all those head­winds, and more. The few big IPOs slated for Hong Kong this year will pro­vide thin pick­ings, with an ever-ris­ing num­ber of Chi­nese in­vest­ment banks sure to push down un­der­writ­ing fees. Mean­while, large in­vestors such as hedge funds are nurs­ing losses from the re­gion's weak and volatile mar­kets.

Last year, equity trad­ing be­came the most im­por­tant fee driver for Asian in­vest­ment banks for the first time since 2010, ac­cord­ing to data from Coali­tion, buoyed by a first-half boom in China's stock mar­ket. IPOs such as Ja­pan Post's $12 bil­lion of­fer­ing and the $4.5 bil­lion sale by Chi­nese bro­ker­age Hu­atai Se­cu­ri­ties helped spur trad­ing. Fixed in­come, cur­ren­cies and com­modi­ties trad­ing (col­lec­tively known as FICC) is usu­ally the big­gest earner for in­vest­ment banks, fol­lowed by equity trad­ing and the tra­di­tional mer­chant-bank­ing ac­tiv­i­ties of ar­rang­ing share and debt sales and ad­vis­ing on merg­ers and ac­qui­si­tions. With China's stock boom hav­ing turned to bust in the se­cond half of last year, equity trad­ing re­mains sub­dued. In­vest­ment bank rev­enues from Asia rose by 4 per­cent last year to $29.6 bil­lion, thanks largely to the pickup in share trad­ing, which spurred a jump in fees for ad­vis­ing hedge funds -- known as prime ser­vice -- as well as an in­crease in equity de­riv­a­tives ac­tiv­ity. By com­par­i­son, global in­vest­ment-bank­ing fees dropped to $160.2 bil­lion from $164.6 bil­lion, hurt by the slump in Europe, ac­cord­ing to Coali­tion's data.

The buoy­ancy hasn't car­ried into 2016. Av­er­age daily eq­ui­ties-trad­ing vol­ume is run­ning about 7 per­cent lower by value glob­ally this year, ac­cord­ing to Bloomberg In­tel­li­gence data. In Asia-Pa­cific, the de­cline is 43 per­cent.

Don't look to hedge funds for help. Af­ter beat­ing coun­ter­parts in the U.S. and Europe last year, Asian funds are off to their worst start to a year on record. Ex­clud­ing those that in­vest in Ja­pan, they lost 6.6 per­cent in the first two months of 2016, ac­cord­ing to Sin­ga­pore-based data provider Eureka­hedge.

There's been some pickup in ac­tiv­ity since the Fed­eral Re­serve scaled back fore­casts for how high in­ter­est rates will rise this year and China pledged to keep its mar­kets sta­ble. Emerg­ing-mar­ket eq­ui­ties at­tracted $1.4 bil­lion of fund in­flows in the past week, the third straight ad­di­tion af­ter 17 weeks of out­flows, ac­cord­ing to data com­piled by EPFR. One Hong Kong-based banker who deals in IPOs said in­vestors were no longer shut­ting the door in his face when he tried to gauge ap­petite for sales. There's also been some re­vival in FICC trad­ing. In­vestors poured $1.05 bil­lion into emerg­ing-mar­ket funds fo­cused on debt se­cu­ri­ties dur­ing the five days through March 9, the most since Fe­bru­ary 2015, EPFR data show.

But China's un­likely to see the same surges in trad­ing vol­umes as it did last year, and there are few big flota­tions planned be­yond a $10 bil­lion Hong Kong IPO by the Postal Sav­ings Bank of China. M&A re­mains luke­warm for Western banks, other than the op­por­tu­ni­ties for ac­qui­si­tion fi­nanc­ing (which pays higher fees than plain-vanilla lend­ing). China's An­bang In­sur­ance didn't use Asia-based in­vest­ment banks in its re­cent ap­proach for Star­wood Ho­tels, while only two banks -- HSBC and China Citic Bank -- are ad­vis­ing ChemChina on its $43 bil­lion takeover of Syn­genta, the big­gest ever by a Chi­nese ac­quirer. While Hong Kong share sales by Bank of Tian­jin and Zhe­shang Bank could bring IPO vol­umes this quar­ter to the same lev­els as the year-ear­lier pe­riod, the big­gest chunks have al­ready been sold to cor­ner­stone in­vestors. For bankers, that means lower in­cen­tive fees. All in all, it's go­ing to be an OK year -- just not great.

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