- The stock market crash has ended Asian companies’ access to cheap capital financing, exposing their long-nurtured dependence on capital markets, just as their need for financing is acute, and likely to come at much greater cost than before
For businesses in Asia and elsewhere, financial survival has become the immediate priority as domestic credit gets squeezed and foreign-currency credit lines contract. But the stock market crash poses another, and less widely appreciated, threat to Asian firms' profitability, or even viability.
This arises from corporate Asia's growing dependence on raising capital in local and international equity markets. Investors in the United States and Europe are now selling Asian and other emerging-market stocks, and could also withhold funds from new listings and other forms of capital raising in Asia.
As the Organisation for Economic Cooperation and Development noted last November: "Asia is rapidly growing into the world's largest stock market … Today, more than half of the world's listed companies are from Asia."
The cost of equity capital is set to rise as a result of the stock market crash when other forms of financing are coming under pressure. According to a Institute of International Finance report earlier this month, "concerns about solvency and default risk have decimated investor appetite for corporate bonds".
Asian companies have long been seen as dependent more upon bank loans or finance from controlling families than on public markets. But this has changed and as the OECD pointed out, they are now "the world's largest users of public equity financing".
Asia has gone against the trend of companies in Western nations refraining from issuing new shares and instead, buying back or even delisting their shares. The United States has lost half its listed companies in the past 20 years while Asian listings grew apace.
The average annual amount of equity capital raised by Asian companies increased from US$46 billion from 2000-2008, to US$67 billion from 2009-2018, according to the OECD.
Apart from China, companies from India, South Korea and Hong Kong have become "globally important users of public equity markets". Emerging markets such as Vietnam, Thailand, Indonesia and Malaysia also rank higher than most advanced capital markets in this regard.
Corporate Asia's growing dependence on raising capital on regional and international stock exchanges has not attracted much attention, but the coronavirus-triggered stock market crash could change this, as unexpected vulnerabilities in corporate financing emerge.
Plunging stock prices are bad news for portfolio investors, whether major financial institutions or individuals, and the dramatic falls seen lately in stock indices have been frightening. But the potential rise this implies in the cost of access to equity capital is less obvious.
The higher stock prices are, the fewer the number of shares that need to be issued to raise a given sum of money, and the lower the overall cost of paying dividends on those shares. Conversely, the lower stock prices fall, the greater the cost of issuing equity becomes.
This might not matter in normal times but the present is anything but. According to S&P Global, US stocks have plunged by 24 per cent this year while British stocks are off 28 per cent, and European stocks 27 per cent. In Asia the overall drop is around 20 per cent, but much more dramatic for members of the Association of Southeast Asian Nations.
Stock market investors obsessed with the "cult" of the equity have been more concerned with the performance of stocks traded in the "secondary" share market than with what was going on in the "primary" issuance market. Yet these primary markets have come to be of key importance for Asia.
The most dramatic manifestation of this has been a deluge of initial public offerings (IPOs) in which Chinese and other entities have raised billions of dollars of share capital. But the less attention-grabbing secondary public offerings (SPOs) have also become a staple of Asian corporate financing.
Over the five years to 2018, Asian companies have collectively raised about US$80 billion annually on local stock markets, chiefly in the form of IPOs.
However, from 2013-2017, Asian companies also tripled their use of secondary market share offerings compared to the first five years of the 2000s.
Why China's role as an investor safe haven is exaggerated
As the OECD noted in its 2019 Asian Equity Markets Review: "An important feature of public equity markets is that already listed companies can turn to the market for a secondary offering when they need more equity capital, for example, to undertake new investments or to bridge a crisis."
That option may not be open to them, however, in the wake of the recent crash in stock markets around the world. At very least, tapping equity markets for bridging finance or investment capital will come at a higher cost than it has during the long years of the late lamented equity bull market.
In such a bull market, it was relatively easy and cheap for firms to raise new capital, which means the Asian corporate sector has been living off a diet of cheap equity capital and low interest rate-fuelled cheap debt in recent years. That golden age has come to an end, at least for now.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
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