In the latest note from ICI’s Glenn Schorr, the analyst points out something that so many others have previously noted: namely, that the market is “weird.” And it’s not just one way. According to Schorr there are at least three different reasons why “it’s still a little weird to us to see equity markets near all-time highs”:
- Eequity Capital Markets volume is down ~50%, we’re in our 10th straight month of down y/y volume and volumes are below average as a percentage of GDP. Reasons for the disconnect include a combination of macro fears spurred by oil’s nosedive, Brexit (EMEA is the slowest region), terrorism and investors being wary about a market propped up by QE and insanely low interest rates.
- Additionally, PE funds are doing more selling vs IPO’ing lately (500bps above average) and block trades are 3x their normal percentage of secondary volume as sellers look to take the money and run instead of taking the next 2 years to work their way out of a position.
- Finally, several industries (like energy, biotech/health care and parts of technology) have been lesser participants given their own fundamental and/or regulatory challenges lately.
Here are the details:
Given where equity markets are, you’d think there’d be more ECM activity – instead we’ve seen 10 months in a row of down y/y results: Over the past 15 years, there’s been a nearly 50% correlation between global ECM deal volume and the S&P 500, reflecting mgmt teams rationally wanting to issue stock at higher prices & their hesitance to do so when markets are tanking. Currently, we’re in a period which seems to have started in the middle of last year where that relationship has disconnected (Figure 1). In a way it makes some sense. During the last 14 months, CEOs have seen a ton of volatility-inducing, hold-onto-your-seats global items – the surprise yuan devaluation in August 2015 (and the sharp market sell-off later in the month); the weakest post-GFC markets month in January 2016; another sell-off spurred by oil’s nosedive a month later in February & most recently Brexit in June.
The impact has been that a full 13 of the last 15 months have seen down y/y announced deal volume. August 2016 did break a ten month negative y/y streak; but in total, 2016 YTD deal volume is off 2015’s pace by more than one-third. Looked at another way, deal value as measured as a % of GDP has also been weak, trending below the historical average since 2Q15 (Figure 2).
This period has been characterized by disappointing IPO volume; block-trade driven follow-on’s; high sponsor-related activity; broad regional weakness & some particularly pressured industries: One feature of this timeframe has been a big drop-off in IPO activity (15% of ECM). At $63bn, 2016 YTD deal value is down 47% y/y and represents the weakest first 9 months since 2009 (Figure 3). In addition to macro volatility and mgmt teams waiting for a better business environment weighing on results, another factor at play is an M&A-led supply cut. Factors like low interest rates, excess corporate cash & low organic growth are enticing buyers; and on the flip side in many cases, sponsors are preferring the sale route rather than an IPO’ because they get their money right away & without the associated risk. As far as secondaries, volume is down less than IPOs but is still off an uninspiring 32% from this point last year (Figure 4).
As well, a very high percentage of the activity is attributable to block trades (Figure 5) which tend to be higher risk. The $72bn of this type of volume YTD accounts for a full 60% of the total U.S. pie, more than triple the historical contribution. In addition, another facet of the current environment is that financial sponsors continue to be a significant part of the total ECM pie (Figure 6), such that their share is tracking at ~17% so far in 2016. While this is down a bit from 2013 & 2014’s peak of 20% because of the M&A supply cuts, it’s about 500 bps above the long-term average.
Regionally, EMEA is faring the worst, down a full 44% YTD y/y, followed by the U.S. down 33% and Asia down 29% (coming off of a +44% bounce in 2015). In terms of industries, there are areas that have been particularly hurting: (1) energy where many players are just looking to survive after 1Q16’s weak & volatile oil prices; (2) technology & biotech where some unicorns are holding off as last valuation rounds remain higher than current (volatile markets, M&A supply cuts too); and (3) healthcare.
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Note, the market’s most obvious “weirdness” factor, namely that some $200 billion in monthly QE from the world’s central banks are necessary to sustain asset prices as of this moment, following 8 years of various QEs and NIRPs, is ignored as by now everyone is aware that when stripping away central bank support there is no actual market but a central bank policy tool as Stanley Fischer admitted earlier.