The alpha from Asia’s growing equity offerings

Equity capital markets play a critical role in a country’s economic development. As of June, the US equity market is the largest by market capitalisation globally, with a 43% share, followed by Europe (11%), China (~11%) and Japan (5%).

In Asia, as the region’s economies developed and expanded over time, so too have their capital markets; in 2010, total capitalisation across key Asian markets was nearly US$15 trillion ($20.5 trillion), which will double to US$30 trillion by 2022.

More importantly, proceeds from Asia Pacific’s initial public offerings (IPOs) also exceeded the Americas in 2022 for the first time since 2018, with 802 IPOs raising US$108 billion. But with Asia expected to account for over 40% of the world’s GDP by 2030, the region’s capital markets need to expand and develop further to facilitate long-term growth.

Asia Pacific maintains its IPO lead

Despite accounting for less than 20% of the MSCI All Country World index, Asia Pacific makes up the majority of global IPOs (see Figure 2). Between 2007 and 2022, there have been over 1,180 IPOs. As of 1H2023, Asia Pacific continues to be the global leader in IPO volume and value, but uncertainty over interest rates and economic conditions resulted in a 2% decrease in IPOs compared to 1H2022. Still, half of the top ten global IPOs were from Mainland China, and one was from Japan. Regarding sectors, technology, industrials, and materials were the major issuers.

Meanwhile, India recorded 80 new IPO listings, driven by small and medium enterprises coming to the market, an increase of 33% over 1H2022. India has continued to increase its global IPO share and currently commands roughly 13% of the market. Interestingly, Asean has also seen a pickup in activity, recording more IPOs in the first half of 2023 than in the previous five years. Indonesia has been a star performer, especially with the materials sector focused on the green energy transition, being at the forefront of market activity.

It is vital to note that the Asia Pacific ex-Japan region has seen a continuous deal flow for IPOs through various economic cycles, offering investors exposure to a good mix of sectors and countries throughout (see Figure 3). In addition, even in the years with fewer IPO deals, there has been a continuous flow of follow-on offerings and blocks.

Share placements offer another avenue

While IPOs are considered significant events for corporations and investors to access equity capital markets, placements offer similar access opportunities. For example, a publicly listed company can turn to the market via follow-on offerings when in need of primary capital to finance investments. Large institutional investors also conduct block trades to acquire or dispose of shares in listed companies, and these trades can often come at attractive discounts.

Between 2007 and 2022, there have been an average of 309 follow-ons and blocks (see Figure 4). Irrespective of market cycles, the market for these deals again has seen a continuous flow, ranging from a low of 105 placements in 2008 to a peak of 491 placements in 2021.

The growing market of retail investors

The increased participation of retail investors is another trend that has been ongoing for a while, thanks in part to the introduction of financial technology solutions. Online investment platforms, robo-advisors, and other digital innovations enable retail investors to easily access trade and participate in more markets. Today’s retail investors often take greater ownership of their financial affairs and are motivated to grow their wealth to meet their financial goals. Rising affluence is another factor fuelling the retail investing trend, and Asia’s growing middle class supports this development.

Historically, IPOs have also appealed to a retail investor for their alpha generation potential. Our analysis shows that IPOs historically demonstrate positive excess returns over the market. Analysis around the “first day IPO pop” shows consistent positive firstday excess returns going back 15 years (see Figure 5). We see a similar phenomenon when looking at longer-term excess returns from participating in IPOs for the same

markets. One thing to take note is that retail investors usually cannot directly participate in IPOs in markets outside of their home country. One way around this is to invest in mutual funds with access to equity capital market events across geographies.

The region’s long-term potential

Asia remains a high-growth region led by China and India, two of its largest emerging economies. Rapid economic progress has resulted in both countries raising their weights in the regional indices. This trend is expected to continue in the medium term, driven by further A-share inclusion (China) and more equity capital market deals in both markets.

Besides these two giants, other countries in the region also possess attractive growth traits that will support more deal activity. For example, the region’s increasingly urban and middle-class consumers will spur more IPOs in sectors related to consumer demand (digital infrastructure, technology and fintech). Meanwhile, climate change is hastening the move to renewables. The energy transition creates huge disruptions in some sectors, creating new business opportunities. Indonesia’s star IPO performance is driven by its ample battery metal reserves, which are critical for electric vehicles.

Companies are also adopting the China plus one strategy due to Covid-19 supply chain disruptions and ongoing geopolitical tensions. Asean

and India are clear beneficiaries, and this shift is expected to underpin the region’s growth further.

Supportive backdrop bodes well

Key reasons for choosing to list and trade on an exchange include costs, liquidity, and listing rules. Asian bourses have recently implemented supportive policies to facilitate issuer and investor market access. India’s capital markets regulator has recently proposed reducing timelines for IPOs from six to three days. Likewise, China has relaxed the rules for IPO listings, which should speed up listings and corporate fundraising. The Hong Kong and Beijing bourses also recently agreed to let qualified companies apply for a dual listing on each other’s bourses.

Given population growth, climate change investments, and global supply chain ecosystems re-routing, the region’s capital expenditure needs are rising. The capex boom will invariably result in more equity capital market deals. The region’s financial markets will be vital in financing these needs and allocating capital to productive projects. And with investors anticipating the end of rate hikes, conditions should become conducive for a more buoyant market with ample primary and secondary offerings in the years ahead.