A master class in capital markets activity

Nov 19, 2010
<p>A day at Citi's IR Academy</p>

Last year, IR magazine visited Citi’s IR Academy to get insights into market trends from leading market specialists. We were looking forward to going back to the stacks to hear first-hand from market experts at this year’s October 2010 symposium. Joining us in the jam-packed room were IROs from US and non-US companies.

To begin the event, Carsten Stendevad, managing director and global head of Citi’s financial strategy group, offered his perspectives on ‘What firms should do with their capital now’, arguing that most companies have made optimization moves to achieve efficiencies and ramp up productivity levels. As a result, the largest global companies now have healthy operating margins and balance sheet leverage. Now that the global economy has stabilized, investors are beginning to push companies to deploy this capital toward accretive investments.

Given that capacity use remains at historically low levels, corporate management teams feel they don’t need to spend incremental capital on growth projects. In the event the economic recovery deteriorates, management is also mindful of the need to maintain a liquidity cushion. Another way for companies to use their cash is in M&A activity, which has seen 15 percent growth in 2010 compared with 2009, but has yet to rebound to prior levels. Stendevad is optimistic about increasing M&A levels because drivers – record amounts of cash, access to financing, attractive P/Es – all point in this direction.

For firms with few significant investment opportunities – whether organic or via M&A – growing capital distributions will become a necessity. Already dividends and share buybacks are sharply on the rise, and Stendevad predicts this trend will become much stronger in 2011.

Next, Tobias Levkovich, managing director and chief US equity strategist at Citi, presented his ‘Outlook for equity markets: more of the same or something new?’ He foresees a moderate return in equities for the balance of 2010 and during 2011. Stocks should be supported by sentiment, valuation and earnings, but margins could become a challenge by mid-2011.

Bonding exercise
Levkovich said excessive bond funds’ flows are deeply concerning for that asset class. In his view, higher yields are probable over the next several years as the market encounters either inflationary pressures or greater risk premiums with the rising US national debt. Easing bank lending standards and equity market wealth effects should sustain GDP and allow the economy to avoid a double-dip.

Levkovich also noted that consumer and capex misperceptions abound. Given margin trends, industrial production, lending standards and National Federation of Independent Business survey analysis, a value orientation appears appropriate today but this should shift back to growth in 2011.

For a trader’s perspective, Kevin Russell, managing director and head of Americas equity trading at Citi, provided his ‘Update on trading markets post the flash crash’. In today’s challenging market, investors have been ignoring corporate fundamentals, and instead are obsessed with macro-economic factors such as the ongoing debate of inflation versus deflation, the potential for round two of quantitative easing, the impact of the stimulus package, potential policy changes post the mid-term elections, and pending financial regulation.

Market movers
Other key market drivers include global uncertainty over the European sovereign credit crisis, the tremendous growth in China, unusual currency volatility and the potential impact of the Basel III banking rules. Russell viewed the equity markets as largely discounting these concerns at this point, and in a position to move forward into year-end.

He was favorably disposed to the equity markets and sees markets higher despite sluggish economic indicators. Better economic data will drive markets higher, while weaker economic data will likely be met with more aggressive quantitative easing, creating the potential for a ‘heads I win, tails I win’ scenario for equity investors.

As for the flash crash, Russell said regulators would do everything in their power to ensure the events of May 6, 2010 are not repeated. He mentioned improved trading systems, heightened market-making requirements to obviate artificially wide buy/sell quotes, and single-stock circuit breakers.

New horizons
The final presenter, John Chirico, managing director and Citi’s head of capital markets origination for the Americas, spoke about ‘Capital markets: what types of transactions will the second half bring?’

Over the next six months, he sees the primary goal of corporate strategists to be steering their enterprises toward profitable growth via new product extensions focused on emerging growth trends, and a continuing emphasis on penetrating emerging markets for established product lines. Coupled with this, he believes there will be continued divestiture activity, including carve-out IPOs and spin-offs, as corporates focus portfolios on sectors with sustainable competitive advantages. In the face of muted organic growth, corporates will also pursue bolt-on acquisitions and contemplate transformational M&A.

While waiting for growth, corporates will be simultaneously focusing on value preservation and distribution. Chirico expects an increase in dividend payouts and buyback activity to boost total returns for investors. Corporates will also continue to take advantage of the low-rate environment to lengthen the maturities of their debt structure, and will use convertible and derivative securities to offset market uncertainty.

Lastly, Chirico expects corporates to focus on enterprise operating risks and methods to manage their exposure through reengineering, balance sheet strengthening and contingent capital financings.

About Citi
Citi, the leading global financial services company, has approximately 200 mn customer accounts and does business in more than 160 countries across six continents. Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including corporate and investment banking, securities brokerage, transaction services, consumer banking and credit, and wealth management. Citi’s Depositary Receipt Services is a leader in bringing quality issuers to global capital markets, and in promoting depositary receipts (DRs) as an effective capital markets tool. Citi started offering DRs in 1928 and today is widely recognized for providing companies with access to its powerful global platform.

Contact: Beate Melten
Email: [email protected]
Phone: +1 212 816 6855

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