Equity issuance robust in Q2, but continued strength in doubt

With so much depressing news coming from the financial industry these days, it’s sometimes easy to forget that the equity markets were on solid ground in the first half of the year.

The Investment Industry Association of Canada’s Q2 2007 New Issues & Trading Equity Report, should remind people just how good things were before the sub-prime market crashed, sending markets around the world into disarray.

“Preliminary numbers for Q3 shows that equity issues will be down,” says Jack Rando, assistant director, capital markets for the IIAC. “But what we can take from this is that up until the market turmoil started the industry was on a good path. Issuance was very healthy and very robust. This proves how things fast things can change in the industry.”

Total equity issuance in Q2 wasn’t just healthy; it nearly broke records set in the first quarter, topping $16 billion.

That impressive number was driven by the common equity issuance segment, which totalled $11.3 billion, up 5% from Q1 and 45.5% year-over-year. Combine the first two quarters and that number hit $22.2 billion, a 57.7% increase over the first half of 2006.

Not only was issuance up, but mergers and acquisitions activity totalled $202 billion in announced deals. The positive performance was due to two major M&A announcements — the $51 billion BCE deal and the $40 billion play for Alcan.

But Canada didn’t just lose companies, in the first half of 2006 Canadian firms bought 265 foreign businesses, with a total value of $59.7 billion. That’s up almost $30 billion from January to June 2006 and $50 billion from the first half of 2005.

“There has been concern expressed about what M&A activity means for Canada,” says Barbara Amsden, the IIAC’s director of capital markets. “But a lot of Canadians invest outside the country. Over time there has been a balance of what’s invested inside and outside the country.”

IPOs had an excellent quarter as well, jumping 65.4% over Q1, which was admittedly a disappointing quarter. Because of the first quarter’s dismal showing IPO activity was 9.4% lower than this time last year, despite raising $1.3 billion.

“With a hot secondary market, why the slump?” asks the IIAC in its report, referring to the drop in Q1 IPOs. The association chalks up the first quarter’s woes to more available private capital, which gave firms second thoughts about issuing IPOs.

Another reason is that investors are taking a closer look at new offerings, instead of just buying whatever’s around. “It is not too long ago that many got burned by the must-have tech stocks that yielded losses and the recent income trust sell-off following tax rule changes last year,” the report points out.

Rando adds that some of the increased IPO activity in 2007 was simply a result of more issuance in Q2.

The S&P/TSX Composite Index also had a good Q2, breaking the 14,000 point barrier repeatedly. Total quoted market value on the exchange hit $2.2 trillion, a $294.7 increase over the first half of 2006. Those numbers helped the index’s three-year annual compound rate of return reach 20.1%.

Not all second quarter numbers were worth cheering about. The income trust sector, though improving over Q1, is still down about 32% from the first six months of 2006, following Finance Minister Jim Flaherty’s Halloween 2006 announcement which removed income trusts’ tax savings.

With overall issuance numbers as good as they are, it will be tough to swallow the totals the industry will likely see in Q3 and Q4. It’s also difficult to predict how the market ups and down in the third quarter will be affected by the rising dollar, which increased most at the end of Q3 and in early Q4.

Still, Rando says “we’re likely to see a drop off in equity issuance in Q3. That’s related to investor and consumer confident in market place.”

A recent Statistics Canada report tracking international securities transactions in September is giving an early glimpse at what Q3 has been like.

In September, Canadian investors shed $4.5 billion worth of foreign securities. That followed a record divestment of $7.1 billion in August. StatsCan says the activity was mostly a result of a “substantial disposition of foreign money market instruments.”

At the same time, non-residents dumped $5.2 billion worth of Canadian securities from their holdings in September, marking the fifth month in a row where non-residents divested from Canadian securities.

So what will it take to get the Canadian equity markets back on track? Time, says Amsden. “I think it’s an issue of people settling down. Canadians will always have to save and invest in retirement, the country’s economic fundamentals remain strong in terms of growth and unemployment — it’s a matter of how long as opposed to whether things will turn around.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(11/19/07)

Bryan Borzykowski