UK Equity Issuance showed a ‘Referendum Bounce’ in 2017 but as always, quality is key

The Corporate & Institutional Broking team works hard to understand the market environment in which our corporate and institutional clients operate in order to help these clients to navigate and take advantage of these trends.

In this update, we examine UK public market Equity Issuance and explore themes being seen in the context of the ‘Brexit’ environment.

Executive Summary

  • Total UK equity issuance in 2017 bounced strongly from the previous year’s poor performance, rising 38.9% to just over £35bn.
  • However, this performance was merely in-line with the 5-year average, being some 15% below the levels seen in 2014-2015.
  • REIT-related equity issuance was a notable point of strength and rose to a new record of £4.92bn, some 14% of the total. This strength has been carried through into 2018.
  • Equity issuance to support industrial companies also surged some 12.5%, to reach £4.38bn, only a little short of the peak levels seen in 2013-2014.
  • 2018 opened with decent momentum which largely carried through the market volatility seen in February. Issuance in Q1 2018 is currently set to moderately exceed that seen in Q1 2017.
  • However, we are now seeing evidence of increased selectivity on the part of investors to UK equity, catalysed by the retracement seen in global equity markets in February. UK consumer-facing propositions seem to be at the centre of this investor angst.
  • Deployable investment capital remains high, although returns criteria have been sharpened. Ultimately much of this depends on a positive assessment of business models and management teams’ ability to navigate a somewhat less certain investment climate.

(Source: Bloomberg, WHIreland calculations)

Having taken a big hit after the UK Referendum in June 2016, UK equity issuance recovered strongly (+38.9%) over the course of 2017. However, at a little over £35bn, this still only qualifies as in-line performance over the last five years. Like the broader UK economy, it’s very easy to build a narrative of a UK issuance market that has proven resilient, but still not doing any better than ‘ok’.

Indeed, 2017 issuance was clearly impacted by the UK Referendum outcome in other ways. For instance, weaker Sterling seen in its wake has contributed to a modest rebalancing of the UK economy towards exports and manufacturing industry. This likely supported the 12.5% rise of industrial issuance seen in 2017. Whilst the £4.38bn total still brings us short of the record levels seen in 2013-14, this is a creditable performance in the face of continued uncertainty in the UK’s trade relationship with the EU-27.

Another consequence of ‘Brexit’ has been UK interest rates have remained ‘lower for longer’. This, together with a resilient UK commercial real estate market has undoubtedly contributed to a continued reach for yield among investors and a continued boom in issuance from Real Estate Investment Trusts (REITs). Indeed, it appears that 2017 was a record year for UK REIT issuance, surging by over 120% to £4.92bn. Despite the Bank of England – together with a number of other central banks – sounding a more hawkish tone in 2018, the fallout in UK Gilts has thus far been modest. Current indications for 2018 are that this sector remains in rude health.

More broadly, if the level of issuance on London’s Alternative Investment Market (AIM) is a measure of risk appetite and a vote in favour of the City of London’s continued ability to price, trade and support growing companies then 2017 was a vote of confidence. According to the London Stock Exchange, some £6.37bn raised on AIM, the most since 2010 – a year when activity was arguably skewed by emergency capital raising in a post-crisis UK.

Lastly, a sign of UK market commitment – and possible future resilience – is that 2017 saw the lowest proportion of UK equity capital raised to repay selling shareholders since 2011. Only 32.8% of equity raised in the UK last year was earmarked for this purpose and we would positively regard signs that fewer investors are looking to cash in their chips despite some strong equity performances.

So far so good, but there are clearly some less positive dynamics also in play as we start to move through 2018.

Certainly issuance had a decent start to the year, flattered a little by a comparatively weak January in 2017. REIT issuance has remained buoyant as already noted, but the volatility that gripped global markets in February has clearly given many investors pause for thought. Despite ample deployable cash balances, heightened risk aversion has led to much of this remaining on the side lines.

Specifically, much of the renewed anxiety currently appears to centreed on the UK consumer. Oddly enough, despite longstanding evidence of squeezed real household incomes and some troubling news flow from parts of the UK high street, this was not reflected in UK capital markets last year. 2017 actually saw the best level of consumer-related issuance since 2014, amounting to £10.08bn – 39% up on the previous year. Arguably this performance might have reflected pent-up demand carrying over from 2016. However one might interpret recent activity, it certainly seems that UK consumer-orientated equity propositions face particular scrutiny from investors at present.

More generically, one can observe that the UK equity risk premium has risen in recent months, both on an absolute and relative basis. Part of this is undoubtedly related to the renewed uncertainty around global policy-making which catalysed the February market fallout. The relative premium is reflected in recent market under performance which has been underpinned by sub-par economic and corporate growth. Arguably much of this remains inextricably linked to the ongoing saga of the UK’s transition to ‘Brexit’.

Presumably such market uncertainty will be slowly dispelled over the remainder of 2018 – one way or another.

There are always opportunities out there – if you know where to look.

(Source: Bloomberg, WHIreland calculations)