The beginning of 2010 will likely see more debt issuances, as more companies seek to take advantage of the low interest rates, according to Keith Magnus, the new Head of Investment for UBS in Singapore and Malaysia.
However, he warns that easy money in the capital market will not transform to a fast buck in equity markets.
“The easy money has been made in 2009,” he said. “Valuations are now priced to perfection” after a sharp rally in the stock prices since March 2009, he said.
He added that big companies with operations across the globe will benefit most from the economic recovery compared to their smaller rivals.
“I think we’re going to see a slew of debt issuances and that’s going to continue into 2010,” he said. “The view of many is that interest rates may trend up in the second half of 2010, so before that happens, issuers are going to try get long-term funding in place.”
Most of the companies have learned their lesson from the economic crisis, as they have to spread out their loan portfolios and not just rely on banks.
“Corporates would be well-advised to extend their debt to five-year or 10-year issues, to better match their assets and liabilities.”
However, the debt issuance for bigger Singapore firms are likely to remain high.
“Investors – both institutional and private wealth clients – are being advised to move out of sovereign debt into high-quality corporate debt. That will fuel demand for Singapore companies, who are generally seen as high-quality corporates, to tap the market,” said Mr. Magnus.
“2009 was really a tale of two halves. In the first quarter, most people thought it was the end of the world as we knew it,” he said, adding that “everyone was thinking that this was going to be a very protracted downturn and that it would be at least a year or two before any signs of recovery would be seen.”
However, stimulus packages are starting to halt and US inventory levels are beginning to deplete, raising manufacturing orders for Asia.
“The markets started to react to this because the markets are forward-looking, and they realised that the bottom had been reached because the pace of decline was slowing down,” Mr Magnus said. “If you look at where we are today, from June to December, there was a lot of activity. The equity capital market is extremely active – everything basically sprang back to life.”
However, Mr. Magnus said the valuation prices are now good and thinks that easy money was made last year.
“So in 2010, investors will be looking for sustainable growth, and that’s going to be in the companies that are market leaders in their respective fields,” he said. “So the large caps, the ones with scale and global reach, that are part of the global recovery, will do better than the smaller caps, in terms of corporate earnings.”
He also expects that corporate mergers and acquisitions (M&A) will increase this year.
“We’ve gone through 2009 with very little M&A activity, because people were focusing on recapitalising their balance sheets, raising capital pre-emptively, and bedding down their operations for efficiency and not wanting to make any moves that would be distracting to the core business,” Mr. Magnus said. “So the M&A growth, the expansion plans, the regional ambitions – everything was just put on hold.”
He added that waiting is now over.