“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning,” Sir Winston Churchill said in November 1942 after British victories in North Africa, to mark a turning point in World War 2 but also to curb too much enthusiasm.

Equity capital markets professionals in EMEA are now hopeful that the global interest rate hiking cycle is over but are keen to reiterate that bullish headline indices do not mean a fundamental change in European equity capital markets just yet.

Equity markets are finishing 2023 on the up, with the US S&P 500 trading over 20% up for the year, the NASDAQ 100 up by almost 40% and Europe’s Stoxx 600 up 9% for the year. As equity markets have performed, ECM confidence has grown, with investors eagerly taking part in accelerated trades, primary raises and convertible bonds.

However, most ECM activity has been in highly liquid names where investors are able to take a short-duration position. There has not been enough of a change in the long-term confidence in stock markets to fuel an IPO revival.

After discussions with their trading teams, several ECM bankers confirmed fears that stock markets may be high on an assumption of speedy rate cuts next year. The data supports the swirling assumptions. According to CME’s FedWatch tool, most Fed Future’s investors foresee the target rate for the US Federal Reserve being 425bp to 450bp, or below, by the Fed’s December meeting.

Considering the current target of 525bp to 550bp, that would mean at least four 25bp rate cuts next year, or more, considering that much of the market is positioning for rates to be even lower.

This expectation is a belief held despite almost all public pronouncements from global central banks, led by the Fed, that talk of an early rate cut next year is presumptuous.

“The Fed has tried to say no rate cuts in the near term, but people just believe what they want to believe,” said one ECM banker. “If inflation starts to pick up and people realise the inflation battle isn’t done yet then we might get a market pullback”.

“Nobody believes rates will be hiked again but the market is way ahead of itself on rate cuts and inflation expectations,”  he added.

Comfort in the familiar

Two ECM investors confirmed that until they can be sure of interest rate directions, they will continue to focus on liquidity and on the accelerated market in the form of block trades.

Blocks have largely worked well this year and have proved a good way for ECM investors to play the theme of rising equity indices but typically, as this column’s sister column ECM Explorer, revealed on Friday, gains were relatively short-lived.

This news service’s proprietary methodology for analysing block trade pricing, Price of Liquidity, analyses discounts on secondary blocks versus the size of stake sold, therefore tracking the discount per unit of stock sold as a ratio, with 0 being the at-market price.

In bad markets the ratio is wider, while on brighter days it tightens, with any trade with a PoL ratio of under -1x the size of stake sold, typically a cheap one for the issuer.

In 2023, the ratio has tightened in line with benign markets and is at its tightest levels, in line with markets being at their highest points for 2023; follow-on volumes have been healthier all year and, as of Dec 8, are 32% higher than last year across both primary and secondary.

IPO volumes though, in contrast, have been poor, with issuers unwilling to take the discounts that investors want in a higher-for-longer rate cycle. Until rate direction is clearer, it is almost impossible to assess an IPO candidate on its financialsand forward-looking projections, said one of the buysiders.

Investors will continue to demand larger discounts to offset that uncertainty, but many issuers may find it too punitive and continue to hold back.

“The high-level thinking is that the blocks business still works well as there is enough liquidity in those trades and therefore a substantial bid,” said the other investor. “Big sell-downs in corporates like LSEG [LON:LSEG] or Heineken [AMS:HEIA] worked well alongside privatisations like NBG [ATH:ETE] or AIB [DUB:A5G] and that is all still a major theme for next year."

“The challenge is how to bring new stories into the market,” he added.

There are some big names in the IPO pipe for 2024 including Renault's [EPA:RNO] electric vehicle division Ampere, EQT-owned Galderma, German perfumery Douglas, Flix SE and private equity giant CVC, to name a few.

But until there is more certainty over rates, few are expected to brave the IPO market in January.

The other most enduring lesson of the last two years, for issuers of any kind, is to deal when you can as you never know what is round the corner.

“When we think about next year there are so many uncertainties outside of rates, including elections in the EU, US and Taiwan. Several consensuses didn’t work out this year; the Chinese economy didn’t rally, there was no US recession and nobody expected the equity markets to end where they did; we also couldn’t predict the collapse of SVB and Credit Suisse,” said one of the bankers.

“People are not very gung-ho but Issuers must look at windows and take them, especially on strategically important primary raises," he added.

In the land of higher rates and macro risk, the prepared issuer is king.

This is the last ECM Pulse of 2023. We would like to wish our readers a Merry Christmas and happy festive season however you may celebrate it. We look forward to returning in the 2024.

Interested in ECM? ION Analytics has more:

ECM Pulse - Return of the Sponsor: investors eye Private Equity sell-downs in 2024

ECM Explorer EMEA - Performance review: big IPOs fall flat but blocks and primary bring investors some cheer

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