Despite the disruption from COVID-19, Australia’s equity capital markets (ECM) have remained liquid.

More than $11bn has been raised on the ASX since March 24, much of it from larger companies topping up their balance sheets in anticipation of further volatility.

But over the next two days, 11 ASX small caps are scheduled to announce capital raisings of their own.

So far, the wave of equity funding rounds have provided some strong returns, with around three quarters of companies that went to market now trading at a premium to their funding price.

Looking ahead, the June quarter is shaping up as a key pivot point for markets, in the sense that it’s the period in which company earnings are expected to cop the brunt of the impact from the economic shutdown that commenced in March.

In a media call last week, Richard Sleijpen — head of ECM (Australasia) at UBS — said investor appetite in the space remained fairly bullish, despite what could be a bumpy earnings season.

With the near-term outlook now the source of considerable conjecture, Stockhead caught up with Sleijpen on Friday to get some extra insights into the current market dynamics.


Q2 critical

To put the flurry of ECM activity into context, Sleijpen pointed out that in an average year the total amount raised is around $30bn.

More than a third of that has been raised in the past month alone. He also compared the current level of activity to the 2008 financial crisis.

“From September 2008 to the end of 2009, about $90bn was raised through the recapitalisation process,” he said.

“Some would say we’re on track to do similar levels due to the potential depth of this crisis, but I don’t think there’s any sort of consensus.”

As part of his media call, Sleijpen said that among the institutional investors UBS was engaged with, cash levels “remain elevated”.

But he also noted a tendency among existing shareholders to only bid for their pro-rata share of a new capital raise, in order to keep cash on hand for additional opportunities.

“This makes targeting the right new investors that have excess cash balances all the more important to ensure the best terms and a successful raising,” Sleijpen said.

And speaking with Stockhead, he said the next few weeks would be critical for gauging sentiment as more companies shed light on how the COVID-19 disruption would affect their full-year earnings outlook.

To this point, bullish sentiment has been driven largely by unprecedented stimulus measures from governments and central banks.

“Back in March, there was a realisation the stimulus would help backstop markets and ensure credit markets didn’t freeze,” he said.

“So in my mind that was the rationale for a bounce from the lows. But where it gets difficult is — what’s the rational for a bounce from today? There’s lots of commentary for and against.”

“As we get close to the end of FY20, just like any year ‘confession season’, in May there’ll be companies coming out with a lot more guidance as to what their full year will look like.”

The valuation game

Sleijpen highlighted that at the big end of town, over half of the companies in the ASX200 withdrew earnings guidance once economic shutdowns were enforced.

So it makes for a complex outlook, in terms of how markets will actually respond to earnings revisions in the wake of such an unexpected catalyst as a health crisis.

“A number of analysts are yet to downgrade their FY20 numbers to extent they could have or should have, depending on your view,” he said.

“So we might see earnings cuts compared to current consensus moving into FY21. Then some would say FY21 is a short-term write-off, so it’s more accurate to price off FY22.”

Investors will also have to put earnings into context on a sector-by-sector basis, factoring in the outlook for industries that have been hardest hit by the crisis.

“So it’ll be an interesting question — how do you actually judge what multiple you should be using, once we get through this and start thinking about fundamental valuation,” Sleijpen said.