Investment banking fees overall down 25%, consisting of ECM (-40%), syndicated lending (-30%), M&A (-28%), and DCM (-14%). That was Europe in the first quarter of 2019, according to Refinitiv. And some of those product segments hit multi-low years in terms of deal volumes. It’s been a bit of a bust. On top of that sorry showing, trading numbers are expected to make for equally gloomy reading when European banks report their first-quarter numbers.
Free advice to anyone working in event-driven areas of investment banking in Europe: don’t pre-spend your 2019 bonus; the fallout could be unpleasant.
In early January, I read an upbeat market commentary after a nervous if rather inconclusive first week’s activity. “No need to press panic buttons in 2019”, screamed the deadline. “If the name of the game in primary capital-raising throughout 2018 had been one of working the windows with a degree of caution and opportunism around timing and pricing, the song remains the same in 2019. If not more so,” the commentary read.
Okay, hands up, that was me, writing in my column for The Asset. To be fair, none of what I wrote was off the mark in principle, but bearing in mind what happened in the first quarter of 2019, and looking at the gloomy outlook that has emerged, I’m changing my optimistic early-stage stance to: okay, so maybe it’s time to start worrying.
But worrying about what, exactly? At the end of the day, given the economic, political and geopolitical headwinds that have led to nervous and occasionally volatile markets so far in 2019, it’s not really too much of a stretch to figure out that unless corporations need the money or have some sort of driving imperative to do deals, they will just ride it out and wait until conditions are calmer.
Look no further than the data for validation of that scenario: European M&A at a six-year low in the first quarter. And you have to go all the way back to the first quarter of 2008, when the world was edging towards the edge of the abyss, to find just 11 European IPOs pricing. Relative to the first quarter of 2018, IPO proceeds fell 98% in Q1 2019.
So back to the panic point, if company owners, entrepreneurs, financial investors, and corporate executives can sit it out and wait for better times, who’s doing the panicking?
Investment bankers, that’s who. After I’d posted that January column on LinkedIn, I received this comment from a global capital markets veteran: “The issue with panic is probably more around the banking community than it is with issuers or investors, because banks generally have an infrastructure sized for an expected primary volume, and if these volumes diminish significantly, banks will have no choice but to adjust the size of their DCM/syndicate/sales/trading teams …” Enough said.
He added that “these banking boom and bust cycles are unfortunately a natural part of the market, and based on what I am reading at the moment, it feels like we are heading in the wrong direction.” (You called that right, Tim).
The one area that did – and does – show promise was/is debt issuance. While Q1 2019 global DCM activity fell 4% year-over-year against a decent showing in the prior year’s quarter, the 48% increase in debt raised in the first quarter of 2019 versus the volatile fourth quarter of 2018 tells its own story; a story of a rapid and dramatic monetary volte-face by the Fed and the ECB.
Forward signalling and monetary policy pronouncements by both central banks had led the market to price in a tightening cycle in 2019. At the same time, though, economic data was worsening, lower growth forecasts were emerging, and the US and China were (and still are) going at it on trade. (Brexit was and still is becoming more of a shambolic humiliation than anyone might rationally have expected, but in the grand scheme of things, it’s a sideshow).
Fears that central banks had misread the gloomier outlook and were likely to make things worse led to a violent rout in equities at the back end of the year.
Debt investors sat on their hands to ride out the volatility and in expectation that higher yields would better compensate them in the coming year, so they came into 2019 with cash on the hip. The dramatic monetary U-turns by the Fed and the European Central Bank based on gloomier growth forecasts (no normalization and lower rates for longer) led to, if not panic buying, then harried efforts to put money to work.
Pricing power had been expected to shift from issuers to investors. In the event, that power is still very much in the hands of issuers. The search for yield as the core sovereign debt complex trades close to or below zero has given issuers across the high-grade, high-yield and emerging markets segments access to good levels.
I’m not going to make predictions about the second quarter on the basis of one week’s activity, but at a macro-technical level, I’ll just say that funding conditions, failing any major shock, have remained on the side of issuers while investors have cash to play with. That might bode well for volumes. Look for an update at the half-year stage.