Author: Ben Debski

As countries with sluggish economic growth look at the ways they can kick-start their economies, many experts talk of the sort of New Deal-style infrastructure spending that US President Franklin D Roosevelt implemented during the 1930s that propelled the US out of a depression.

However, choosing the right type of infrastructure project is often down to politicians with grand ambitions of a legacy, and seldom do they choose well. Frequently, politicians choose projects that are extremely high profile and expensive, but neglect the practicalities of what their country actually needs. No more obvious is this apparent than in the touting of high-speed rail projects.

Wrong track
Rail enthusiasts have long called for a network of a high-speed rail as a solution to the growing discontent over air travel’s impact on the environment, while other proponents say it could help drive struggling economies out of recession. However, the costly, time-consuming, community crushing infrastructure projects have many detractors.

Popular across China, Japan, and mainland Europe, and particularly in France, high speed rail has for a long time been the pet projects of politicians desperate for some sort of grand legacy, while proving deeply unpopular with those that would be faced with the upheaval in their constituencies that could bring about voter disgruntlement.

The British government, off the back of plans by Labour’s former Transport Minister Lord Adonis, plans to build a new high speed rail network that stretches from London to the north of England, hoping to bridge the wealth gap that exists between the two regions through increased trade. While it would be nice – in a slightly misguided, romantic way – to see the pioneer of rail transport catch up in the technology stakes with its rivals on the continent, a compelling argument for its financial benefits has yet to be made by high speed rails proponents.

Planning squabbles in affected areas are set to rumble on for years, while the cost, at £33bn, is extraordinarily high considering the fact that the UK is currently fumbling its way through a recession. The planned opening of the first phase, between London and Birmingham, would also not happen until 2026, with the next stage, a twin-spur up to Manchester and Leeds, opening eight years later in 2033. In contrast, China could probably build a similar link in a couple of years.

The UK doesn’t need high speed rail when it already has an extensive, if creaking, rail network built by the Victorians. It even has a considerable amount of disused rail lines decommissioned after the Beeching Report of the mid-1960s that could potentially be reopened to help ease overcrowding and get people off the roads. Lord Adonis has, despite being out of government, remained a vocal cheerleader for a scheme he helped dream up.

While the country undoubtedly needs an increase in infrastructure spending to help kick-start growth, paying for something that is little more than an expensive vanity project seems an ill-thought out move.

Elsewhere, there are continued calls by Mayor of London Boris Johnson for a new hub airport in the Thames Estuary; a ludicrously expensive and over-the-top scheme that would do nothing to address airport capacity issues in the short and medium term, but a lot for the Mayor’s considerable ego.

Other parts of the world have similar experiences with major infrastructure projects. In the US, the Governor of California, Jerry Brown, has been a strong supporter of constructing a high speed rail route between San Francisco to San Diego, helping to alleviate the pressure on the existing road networks and tempt people off polluting planes.

Again, however, there has been plenty of opposition, with critics arguing that the apparent $80bn cost to the taxpayer far exceeds the potential benefits, with the completion date not until 2033. Governor Brown has also been accused of pursuing a legacy project that would help him step out of his father, former California Governor, Pat Brown’s considerable shadow. Pat Brown was, after all, the man who shaped modern California, with massive spending on water-resources and education in the state.

Honesty
Governments need to be honest when talking about infrastructure projects. High profile schemes like high speed rail might seem attractive to politicians, as they reflect a tangible, visible investment in jobs and the modernisation of a country’s infrastructure. But sometimes they are unnecessary and costly.

Instead, governments should look at steering investment towards unglamorous projects that may not be quite as visible to the public, but will ensure the country is up to speed with the rest of the world. The UK, for example, is crying out for investment in a proper high speed broadband network that will connect the entire country to the web, while updating the country’s ailing, and increasingly dependent energy infrastructure must be a priority.

Another key area, often neglected, is that of higher education and the research that will help drive innovation in the future. This is something the elder Governor Brown realised in California, helping to transform the states’ universities into a hub of high ended technological research. By way of contrast, the British government has been criticised recently for its funding for higher education and research.

Politicians are always keen to talk up expensive projects that will cement their names in the future, safe in the knowledge that they won’t have to pay for it in the meantime. More practical planning and less political posturing would go a long way to creating the long-term benefits countries like the UK need.

The coming decade will present global businesses with an opportunity for growth so large that it will surpass that of the industrial revolution, as a result of the rapid economic transformations occurring in emerging markets.

According to a recent study by the McKinsey Global Institute, by 2025 annual consumption in emerging markets will reach $30trn. In particular, India and China are seeing growth of ten times more than countries during the Industrial Revolution, at far bigger scales.

Britain, the birthplace of the Industrial Revolution, took 150 years to double its economic output per person, says the study, while the US took 50 years. In contrast, China and India have taken just 12 and 16 years respectively.

The report says: “Britain and the United States began industrialisation with populations of about ten million, whereas China and India began their economic takeoffs with populations of roughly one billion. Thus the two leading emerging economies are experiencing roughly ten times the economic acceleration of the Industrial Revolution, on 100 times the scale—resulting in an economic force that is over 1,000 times as big.”

The rapidly increasing middle classes in these regions means there is a clear opportunity for businesses to tailor their operations towards harnessing this consumption. The report add: “The value consciousness of emerging-market consumers, the diversity of their preferences, and their sheer numbers mean companies must rethink every aspect of operations, including product portfolios, research and development, marketing, supply chain management, and talent development.”

The trend of international companies investing in emerging economies has increased steadily over the last decade. Last year, $1.5trn in foreign investment went towards emerging economies, according to McKinsey. This represented a jump to 32 percent of the overall global figure, from the five percent seen in 2000.

 

Greenland is a nation characterised by both traditional values and the desire to change for financial gains. Bearing on the public consciousness as much so as environmental concern, is the extent to which the nation will bend to the will of larger nations and corporations in ensuring a richer future.

Despite having a predominantly inuit population of only 57,000 and an economy whose primary industry is in fishery, Greenland is host to a number of valuable mining opportunities – most notable of which being a vast deposit of rare earth elements. Having this year unearthed a 1 billion ton iron ore deposit in south-western Greenland, British-based London Mining is set to exploit the ore with the financial and manufactural backing of a number of Chinese enterprises. The proposed plant – costing in excess of $2.3bn – is expected to bring diesel power plants, a road and a port to Greenland’s ever-expanding capital of Nuuk. The economic benefits of such projects are clear for all to see, though Greenlanders are required to compromise their legal system in aiding the progress of foreign investment.

‘Zero tolerance’
Laws restricting mining practises – particularly those ascertaining to the exploitation of rare earth elements – have long persevered in Greenland. “The policy of zero tolerance is the main issue for us,” said Ib Laursen, operations manager at Greenland Minerals and Energy (BMP), though the IA party claim that only by doing away with these laws could future mining projects be made feasible. As such, the BMP has demonstrated a blatant disregard for national mining policy, having awarded some 150 licenses for mineral exploration. Such negligence has so far resulted in $100m having been spent by foreign companies through 2012 and a further $1bn being spent in offshore exploration. Many of Greenland’s population consider fundamental laws to have caved far too easily under the weight of more powerful nations, echoing larger public concerns that it may be losing its national integrity in the shadow of large, multinational corporations.

Greenland’s Prime Minister Kuupik Kleist, speaking in relation to these practises, said that while Greenland “is not a rich society… we need to establish new, significant economic activities” in order for the country to prosper and to benefit from richer economies.

Although mining projects provide for rewards in the way of financial prosperity, Greenland’s wider population are reluctant beneficiaries in that the economic benefits are often gained at the expense of lessened environmental and national integrity.

Changes to the law
Much of the population fear that Greenland is incapable of absorbing so much investment and foreign work, and that untrained and poorly educated Greenlanders will be made redundant with the coming of cheaper foreign workers. Concerns of this nature were heightened in December, when a new law was passed allowing companies to pay foreign workers lower wages than Danish law currently demands of Greenlanders. The acting IA party claim that “this law gives Greenland a stronger hand when negotiating with companies seeking to begin operations here,” though heavy public and political opposition claim for the government to have weakened all too easily.

The new legislature has been subject to harsh scrutiny, mainly in that Greenlanders claim the issue was rushed through parliament without debate. Many recognise that it will “have an enormous impact on Greenland’s future. We can’t afford to rush a decision through parliament without involving the entire population through a democratic process,” as put by Anders Meilvang, head of Transparency Greenland. While few oppose the fundamental need for change, it is instead the rate at which it’s being exercised that concerns the vast majority of Greenlanders.

Regardless of recent law reforms, Greenlanders, as a whole, recognise the importance of having foreign investment strengthen their economy. Greenland lawmaker Naaja Nathanielsen states that “there is a need to become independent economically” and that “most people see it not as opportunity, but as necessity”.

While 2012 doesn’t seem overly distant to many of us, in Asia’s IPO market it seems to be long forgotten – perhaps because it was particularly dismal.

The Asian market suffered a decline in both the number of IPOs and the value of listings. The total value of IPOs fell by 35 percent to $57.1bn deals, down from $87.8bn in 2011, according to data provider Dealogic.

The statistics were stark across the majority of Asia’s developed economies. According to CNBC, Hong Kong’s stock exchange (SEKH) witnessed a 14.29 percent drop in the number of listings and a 75 percent drop in value of listings from the year prior. Singapore was almost on par, with a 15 percent drop in IPO issues and a 43.96 percent drop in values. The silver lining was Malaysia – which unlike its regional siblings, experienced a 260 percent jump in the value of listings. However, it too experienced a decline of 50 percent in the number of issues.

What was behind the dramatic downfall in Asia’s IPO sector? Put simply: unattractive market conditions. Negative economic sentiment and instability in global markets dampened investor appetite for all forms of public fundraising. The euro crisis, the US fiscal cliff and a botched Facebook IPO all left their mark and added caution to the wind, muting many of the planned IPO activities.

The new climate of 2013
Fast forward to 2013, and we get a staggeringly different picture, even this early in the year.

An explosion of recent IPO activity in Asia is driving hopes for a resurgence in the initial public offerings market, both for the region and also globally.

The Financial Times has reported that across Asia-Pacific, excluding Japan, equity capital market volumes are at the strongest since 1995, at $24.6bn; almost four times the $6.4bn raised in the same period last year.

According to the Financial Times report, notable players include China’s Sinopec Engineering, which filed for a $1.5bn listing this year, and China Galaxy Securities which also filed to raise as much as $1.9bn. Copper company Chinalco Mining Corporation International also raised $400m early this year and China Petroleum & Chemical Corp recently completed a $3.1bn equity follow-on issue. In February, Hong Kong had raised $788m since January 1, compared with $227m over the same period last year.

But while Hong Kong’s recent surge in equity capital market activity is noteworthy, there’s another bright star in Asia’s burgeoning IPO market.

The new poster child for IPO activity is Japan. Japan – a country many investors have long judged by its stagnant growth rates and aging population – has re-emerged on the world stage as a beacon of hope for positive equity market activity.

Japan has witnessed $1.4bn in IPOs since 1 January 2013, in contrast to $18 million over the same period last year. In fact, firms have raised more funds in Japan this year than in Asia’s other developed markets combined. Ben McLannahan at the Financial Times has reported that worldwide it now ranks number two by funds raised according to Dealogic.

Perhaps what has really gotten investor and analyst attention is the IPO of Prologis REIT in March, a Japanese real estate investment trust set up by the world’s largest owner of industrial buildings. The IPO raised an impressive 100.3 billion yen, after bids were outnumbered four times. Shares surged by over 27 percent on open to 700,000 yen. The IPO comes at a pivotal for the firm, which is experiencing rapid growth in its e-logistics and modern warehousing operations due to quickly expanding consumer demand for online shopping.

This IPO is notable for its high valuation, but also because it demonstrates a commitment of foreign investment support back into the country. [According to the above Financial Times report], net buying of Japanese equities by overseas investors came to more than 1 trillion yen in the first week of March 2013, the highest weekly figure on Tokyo Stock Exchange back to 1982.

Why the change of heart?
Since the financial crisis, the equities market across the world has been like the losing team on a football field; the safe-haven retreat of bonds has won the game every time.

Equity markets – and particularly the IPO space – has been eerily quiet until recently, due largely to the fragile global economic climate and continued turmoil in world markets. So what has contributed to this rapid change of direction?

In the case of Japan, the lift in IPO activity comes at the same time as new Prime Minister Shinzo Abe’s monetary policies are released – seen by many as the game-changer needed to pull Japan out of its recession and years of deflation.

Abe’s promise to strengthen the world’s third largest economy through more assertive monetary policy has re-energised investors. What’s been referred to as ‘Abenomics’ sees Japan taking bolder policy steps than ever before. To help boost growth, earlier this year the Bank of Japan announced it would double the inflation target to two percent and committed to an open-ended asset purchase program starting in 2014.

More aggressive monetary policies are being seen across Asia more broadly. The MSCI Asia ex-Japan index has steadily risen nearly 15 per cent from September last year, largely on the back of central bank actions and improving market sentiment.

‘The great rotation’ is upon us
Improving market sentiment and central bank actions are all helping lead investors out of bonds and back into equities – this change in direction has been dubbed ‘the great rotation’ as investors get back into the search for yield.

It is an especially prevalent trend in emerging markets. According to fund-tracker EPFR, some $7bn of inflows to emerging market equities in the first week of 2013 were the largest on record, also outstripping demand for emerging bond funds for a full five weeks.
Consider that Asian companies have sold more equity in capital markets in the past five weeks than any start to the year since records. Japan’s Nikkei stock index has done particularly well, rallying around 44 percent since mid-November.

Yet the rapid pace at which this tilt back into equities has occurred also begs some important questions. Is this surge in IPO and equity market activity sustainable in the long term? Or is it early-year optimism, which hasn’t correctly priced in potential market risks that may still cause a retreat back into bonds? In other words, is Asia’s IPO market overweight?

For Japan, there is concern by some that the government’s proposed monetary policy changes are not enough to deliver long term growth, unless accompanied by broader structural changes. So far, no tangible discussions or action have taken place to tackle broader issues – such as altering immigration policies to help deal with an aging population; or deregulating protected sectors like agriculture. There is apprehension that without the broader reforms, the ability of monetary policy to drive long-term growth is limited.

Considering Japan’s monetary policy alone, some ask if the current reforms are going to be enough to achieve any noteworthy growth at all. There are no clear timelines to meet the new inflation target and it is likely that more aggressive quantitative easing (QE) will be required to meet any expected gains – something the BoJ has been long opposed to. Albeit, the expected leadership reshuffle in the BoJ later this year may change that. More broadly, the continuing devaluation of the yen is also a cause for concern.

More broadly across the region, potential risks such as increasing inflation rates, an outflow of hot assets from the region, North Korea’s ongoing nuclear program, Europe’s continuing turmoil and its potential spread, are all things that could trigger further global uncertainty and lead to investors swiftly marching back out of equity markets.

End of uncertainty
But just how likely is a retreat at this stage? And how much does it really matter if IPO listings are currently overvalued?

Many think a retreat out of equity and IPOs in the latter part of this year is unlikely and believe that investor appetite in Asia’s IPO market is on track for growth.

This is on account of a few things. Firstly, many argue that we’ve seen the worst of the global economic uncertainty last year and that any macro-risks are already priced into the IPO market.

In addition, ongoing aggressive action from central banks is likely to continue to promote and enable growth.

Moreover, the fact that many deals so far have been over-subscribed suggests that there is hot cash ready and waiting for further listings.

There is also a strong pipeline of deals lined up. Because Asia’s economies are still emerging, many of its small to medium sized businesses are now at a stage in their development where a public float is the rational next step. This is particularly true for firms in high-growth industries such as metals and mining as well as real estate and infrastructure. The majority of IPOs in Asia are expected in the second half of the year and are also likely to include some that were put on hold last year on account of a poorer economic climate.

Whether the market is currently overpriced or not in the short term, may not matter hugely. Emerging market companies getting more cash to revinvest in their businesses in the short term at a pivotal point in their business life cycle is arguably a positive thing for their long-term growth and for that of their local economies. Any initial over-weight positions are likely to correct themselves and rebalance in the medium term as those companies use the capital injections to fund growth.

With a robust network of investor support not likely to go away any time soon, all signs point to a boom of Asian IPOs now well and truly on our doorstep.