Rob Waldner, Chief Strategist and Head of Macro Research for Invesco Fixed Income, gives us an update on the drivers for investment in bond markets based on the US economy, while Gina Kashinsky, Executive Director, Global Head of Equities at IHS Markit lays out primary market activity in the US equities space.
New issues this qweek:
Nasdaq – Ozon Holdings
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Dan Barnes This is Primary Markets TV for the Americas – yourupdate on newly issued securities. I’m Dan Barnes. Coming up this week on NASDAQ, we’ve got one IPO from Russian online retail giant, Ozon Holdings and that’s on today, 23rd of November. This year, we’ve seen around 340 IPOs so far, with a majority in September and October. We’ve also seen pricing of IPOs improved as this year progressed. If we look back at the fixed income markets, so far, we’ve seen around 1.73 trillion of debt issued, which Morgan Stanleys analysts put around 65% up year-over-year. Joining me now, Rob Waldner, Chief Strategist and Head of Macro Research for Invesco Fixed Income and Gina Kashinsky, Executive Director and Global Head of Equities at IHS Markit. Guys, welcome to the show.
Gina Kashinsky Thank you. Dan, it’s my pleasure to be here.
Rob Waldner Thank you, Dan. It’s great to be here.
Dan Barnes Gina, can I start with you. In equities, which deals and trends have really stood out for you so far?
Gina Kashinsky So, 2020 has certainly been an unprecedented year. We’ve started off generally strong. But when COVID-19 hit hard in February and March, the primary markets nearly came to a standstill. For context, there were only 34 deals that priced in March, which is the lowest monthly total since February of 2016. But what’s more interesting is how quickly the market showed its resilience. Even with all the challenges that can arise from a rapid fire transition to a remote working situation, I’m impressed to know that more than 1280 deals priced so far this year, making it one of the most historically active years in the new issuance space. What stands out for me particularly, is how well the IPO market has performed; we’ve seen over 375 market debuts, which is notably above the previous high of 295 seen in 2007, and approximately 70% higher from the prior year. The main surge in volume has come from spac (Special Purpose Acquisition Company) IPOs with 180 deals year to date, and that’s more than triple the previous high from 2019. Over the last few weeks and months, several sectors have seen a notable boom in issuance, most particularly the biotechs and pharmaceuticals, as they drive research for vaccines and therapeutics in the battle against COVID-19. Fx, we saw Regeneron Pharmaceuticals and Moderna, and those have topped the charts for the health care sector. We’ve also seen an uptick in leisure and transportation companies who are attempting to make up for lost revenue from the lack of global travel. Now, as we head into the last few weeks of the year, COVID-19 cases once again are on the rise and we’re seeing new lockdowns. So really, it’s anyone’s guess how this will shape up, but at the end of the day, the fact is, the need for capital remains strong across all industries.
Dan Barnes So just in your best estimates, how do you think the rest of the year is looking?
Gina Kashinsky Well, with so many unpredictable variables, we’re cautiously optimistic about the market continuing its strong pace in 2021. In recent weeks, the IPO pipeline has remained robust. We’ve already seen two highly anticipated unicorn deals drop, including Airbnb and DoorDash. One trend we expect to continue in the new year is the spac-phenomenon, as companies resort to a different pathway to accelerate their IPO process. In addition, we may see companies break away from conventional execution to retain more control. Fx this past year we saw Palantir Technologies and Asana go public via direct listings, while Unity Software use the modified, Dutch auction approach. Other developments that will persist in 2021, is this growing shift of virtual roadshows, which is actually driving more deals and investor investor engagements.
Dan Barnes That’s really interesting. I was going to ask you about that, because, of course, with the current lockdown in many geographies, how do you see issues reaching investors right now? How does that virtual roadshow element work?
Gina Kashinsky Virtual meetings are now the new norm. And this has led to quicker and more efficient roadshows as they expedite the marketing process for deals. As an example, in the IPO space, prior to COVID-19, the typical in-person roadshow would last 10 to 14 days. But now, with virtual roadshows, we’re seeing the wrap up in an average of 3-5 days, allowing for more deals and more capital to hit the market. As we highlighted today, the overhead costs for each deal can be greatly reduced since there’s no physical travel, deal execution can be achieved in a fraction of the time. But most importantly, there is now more improved visibility into investment engagement data through the use of digital platforms. For our part at IHS Markit, we strongly support the industry’s move in this direction, because it allows for a more seamless, go-to-market experience. And it’s great for our business partners. We’re able to streamline investment engagement data directly into our book-filling solutions. One final trend that’s worth noting is on the buy-side, where we’re seeing a shifting dynamic toward more autonomy and independence throughout the deal execution process. As that’s happening, the marketplace of tools for buy-side access has expanded, and they’re actually allowing folks on the buy-side to manage their own orders without compromising their banking relationships. There’s a lot of buzz around this growing buy-side demand, and the expectation is that it will support a robust pipeline of investors in primary markets.
Dan Barnes That’s great, Gina. Thanks very much. And Rob Waldners here to represent the buy-side. Let’s turn to the fixed income markets now. Can you tell us what factors sit behind your approach to fixed income investments today?
Rob Waldner There are basically two main drivers of the fixed income market today and have been drivers for the last several months. The first one is the strong recovery that we’ve had out of the COVID-19 crisis, and that stronger than expected growth looks like it should continue in the medium term, especially as we’re getting very good news around vaccines and other treatments that might help us deal with COVID-19. The second factor, though, is that policymakers have been very aggressive and they’ve done an extremely good job in our view of managing this crisis and have committed to continuing their support going forward. So, what that means is interest rate volatility is very low and they really locked the short end of the yield curve down at a negative real rate, meaning after inflation you will get back less than you put into a treasury. So that low volatility and low interest rates, negative real yields combined with better growth, is very positive for credits and keeps interest rates low.
Dan Barnes That’s great. And has your view changed as things have progressed?
Rob Waldner We know a vaccine is coming, but that will take a while. So we have a pickup in the activity of the disease, which will put a headwind to growth here for the next several quarters, in our view. It’s not going to put us back into lockdown, but it will be a headwind for growth. Policymakers are also kind of less active right now, so we have considerable doubt around what fiscal policy we will get. So from a fundamental perspective, growth is a little slower, policymakers are a little bit less engaged. And at the same time, we’ve seen valuations get to much tighter levels, so that’s whether you’re looking at credit, US high yield, US IG, all time lows and yield across many of these asset classes. That makes us a little bit more cautious in the near term on those developed market assets.
Dan Barnes So what does that mean for the risk reward outlook from your perspective?
Rob Waldner It means two things. One, be a little bit more cautious in your in your allocations. But I think the other thing is investors should start to think elsewhere. So coming out of this, it made a lot of sense. ‘Don’t fight the Fed’, they always say, and buy what the Fed was trying to control, buy what the Fed was supporting, which was credit assets in the US and the ECB was doing the same in Europe. So those assets were a great place to invest with relatively safe returns. But now, as I laid out with the valuations and the headwinds, we think the medium term picture is very positive to be supportive for emerging markets and other non US entities. And the valuations there are much more compelling, so the dollar is arguably overvalued against many emerging market economies, particularly those in Asia. And as the Fed keeps low rates, and real rates negative and volatility very low, you should see that really benefit these emerging markets. It allows flows to return, allow the dollar to weaken, which is positive for the overall financial conditions in these emerging markets. And you have valuations there, which are much better than they are many of the developed markets. So, we think as a fixed income investor, we think you probably need to start rotating and looking at some other places other than your core fixed income. And emerging markets is certainly one place to look. One of our favorite investments right now is China’s local currency, which is opening up to the world and leaving politics aside, just talking from an investment perspective, you have much better yields than in the US or yields over 3% in the 10-year sector. And a currency that looks undervalued, has a good balance of payments and looks like it should appreciate. So, 3% in appreciating assets certainly beats negative real yields in the US.
Dan Barnes Sure thing. Rob, Gina, that’s been great. Thank you both so much.
Gina Kashinsky Thank you so much. Nice to meet you, both.
Rob Waldner Thank you so much.