Mutual fund managers and distributors will be looking eagerly at the recovery in Asian initial public offering activity for evidence of returning risk appetite among retail investors in the region. Last year, fund industry gross sales in Asia were strong, driven by the popularity of higher yielding bond funds. Unfortunately, a large portion of these subscriptions were at the expense of continued redemptions from existing holdings in equity funds. Historically the industry in Asia has been at its best when risk appetite has been increasing and not flatlining.
The situation in China is most acute, despite sales data showing healthy fund flows. Unfortunately, most of these flows are to quasi-bank and short-dated cash products that substitute for deposits, and, as such, attract a low fee for the fund manager. The industry will simply not be able to survive on such margins without consolidation unless equity appetite improves. The authorities in China have announced multiple measures to reignite interest in the stock market. These measures were successful in the final quarter of last year although the market has since lost momentum.
The absence of retail investor risk appetite since the global crisis coincided last year with a downturn in IPO activity. In 2012, the region suffered from poor stock market performance, a general lack of investor confidence and poor liquidity. As a result, there were a number of aborted new issues, including Graff Diamonds in Hong Kong ($1bn) and Formula One in Singapore ($3bn). Overall, Asia-Pacific stock exchanges raised $53bn from 444 IPOs in 2012, compared with $92bn from 679 in the previous year. Hong Kong fell to fourth place in the global rankings in respect of new issues, having previously been in top spot for three consecutive years.