Companies based in emerging markets will continue to rely on depositary receipts as an important means of financing their growth in 2013, taking advantage of continued global investor interest in the fast-growing countries and regions of the developing world.
"Last year was a challenging year for the equity capital markets due to a number of broad macroeconomic factors, including the slowdown in China's economy and the turmoil in Europe," says Dennis Bon, global head of depositary receipts for J.R Morgan. Initial public offerings globally totaled $117 billion in 2012, a decline of 29% from 2011, according to Thomson Reuters. "While the value of IPOs in the broader market declined in 2012, IPOs in the DR market held up well, and the pipeline of issues waiting to come to market is quite significant," Bon notes.
The backlog of future IPOs in Russia is particularly large, due to that country's privatization program, he adds. A large number of companies in China also would like to list overseas using DRs, according to Bon. "Russia will be the biggest driver of new DR issues in the year ahead. China also has the potential to be a significant issuer in the US market if it can resolve corporate governance and accounting issues with US regulators. It is in the interest of both China and the US to resolve these issues."
MARITIME, BANK IPOS LIKELY THIS YEAR
Russia's privatization program will bring in even more revenues for the government in 2013 than last year, prime minister Dmitry Medvedev said at the World Economic Forum in Davos, Switzerland in January. Sovkomflot, the Russian shipping company, and VTB Bank could be privatized this year, along with other companies, if market conditions are favorable. Latin America also could be an active region for DR issues in the year ahead, Bon notes, with companies in Colombia and Peru set to join traditional issuers from Brazil and Mexico in tapping the DR markets. He says: "There likely will also be a few new issues from Taiwan this year, but companies in the BRIC countries [Brazil, Russia, India and China] will once again be the most active issuers."
Looking further down the road, some new frontier markets, such as Burma, Iraq, Mongolia and Vietnam, could produce new DR issues in the next few years. "It takes time to develop capital markets and regulatory regimes," Bon says. "You cannot open a new market without an appropriate and effective regulatory regime in place."
ADR INDEX BEATS S&P 500
From a share price point of view, 2012 was a great year, says Christopher Kearns, deputy CEO of BNY Mellon's Depositary Receipts business. "It has been a tough few years for the financial markets, but some of the uncertainty in global markets has begun to be reduced." The BNY Mellon Classic ADR Index, which is the only index to track all DRs and foreign shares traded in US markets, rose 18% last year, beating a 16% rise in the Standard & Poor's 500 US stock index. "This is significant, given that overall DR trading value dropped in 2012 and US stocks performed well during a period of political wrangling," Kearns says. "International portfolio diversification through DRs has offered a viable option to many investors, even as geopolitics led to periods of unsettled markets and made companies cautious about committing capital."
The good returns achieved by investors in equities last year came on low market volume, Kearns notes. "There is a lot of money sitting on the sidelines," he says. "The good news now is that many of the uncertainties have been relieved, the US fiscal cliff issue has been defused, and there is relative calm in Europe."
DR PIPELINE GROWS
The coming year is shaping up to be a better year for the equity capital markets, with a healthy pipeline of new DR issues, according to Kearns. In Russia, for example, the DR has become the de …