A European perspective: Four themes shaping capital markets in 2019

Issuers and investors are keen to participate in capital markets in 2019. However, many are waiting for greater macroeconomic stability and clarity over political issues such as Brexit before translating intention into action.

At a recent event including Marco Baldini, Head of EMEA and Japanese Bond Syndicates, Tom Johnson, Head of Equity Capital Markets, EMEA, and Reid Marsh, Head of Banking, EMEA, four key themes surfaced which will likely affect deal and issuance activity in the first half of 2019.

1. Quantitative easing – The end of QE in Europe will lead to a rerating of credit prices…

Like the US Federal Reserve did in 2014, the European Central Bank (ECB) ceased its programme of large-scale bond purchasing in December. That is likely to lead to a substantial rerating of pricing and yields in European bond markets that could take some time to play out, according to Marco Baldini, Head of EMEA and Japanese Bond Syndicates.

…but could also see a return of private investors to European fixed income markets

However, if bond yields in Europe do trend higher, we are likely to see a return to the market by private investors previously deterred by the overvaluations created by QE. That should be very positive for bond markets in 2019 and will help compensate for the ECB exiting the market, says Baldini.

2. Debt Capital Markets – Pricing will be key to attracting bond investors in 2019

While 2018 was a relatively good year for global high yield bonds, investment grade issuance was down across all markets, reports Baldini. As we go into 2019, concerns such as international trade talks, the slowdown of growth in China, political upheaval across Europe and the end of quantitative easing in Europe will continue to hold back borrower activity – particularly in sterling and euro-denominated debt, he forecasts.

Likewise, many portfolio managers have reduced their bond buying to avoid incurring further losses as credit spreads continue to widen. To get deals done in early 2019, therefore, issuers will need to be extremely flexible on pricing to encourage these defensive investors to support their transactions, Baldini says.

Despite these challenges, Barclays sees a lot of money ready to go into debt capital markets. Baldini is confident some good issuance windows will present themselves to those borrowers eager to make up for lost time. But in both investment grade and high yield markets, pricing and realistic risk premia will be key to attracting investors, he says.

3. Equity Capital Markets – More macro clarity required before participants can act

2018 was a tough year in equity capital markets and saw the second lowest level of European ECM deal activity in the last 10 years, reports Tom Johnson, Head of Equity Capital Markets, EMEA. IPO activity was strong in the first half of the year, but effectively shut down after August in response to a range of macro uncertainties. Investors are also staying away from European equity markets as political uncertainty persists not only in the UK but in Italy, France and Spain.

Johnson anticipates a volatile initial three to six months of 2019 for equity markets before there is sufficient clarity on macro issues for both issuers and investors to make informed decisions. Corporate decision makers don’t necessarily need a bull market, just clarity on these issues. As in debt capital markets, there is a major pipeline of ECM activity that wants to come to market. But Johnson feels far more stability and clarity is required before that pent-up demand is likely to translate into transactions.

4. M&A – Falling asset prices creating opportunity

The likely level of M&A activity in 2019 is hard to call. On the one hand, a volatile market environment means that many company boards are likely to hold back from transactions, says Johnson. But with asset prices falling, corporates with strong balance sheets are likely to see some very attractive opportunities.

Chinese acquisitions in Europe and the US could be an ongoing area of activity for debt-raising for M&A according to Baldini. In the private equity sector, Johnson reports that discussion is turning to public to private (P2P) transactions for the first time in three or four years as valuations fall.

Reid Marsh, Head of Banking EMEA, additionally observes that across almost every sector, corporate clients are facing disruption and some kind of existential threat around technology or competitor innovation to which they need to respond – and that is helping to create a backlog of potential M&A activity.

In summary

Ongoing macroeconomic uncertainty and market volatility are likely to dictate the level of deal and issuance activity in 2019. However, a rerating of asset prices in both debt and equity markets are likely to present compelling windows of opportunity for those willing to act. In any case, it will likely be an eventful year ahead.