Why 2014 looks like another record year for Hong Kong's IPO market

The strengthening global economic environment and investor confidence is expected to fuel the propulsion in the Hong Kong IPO market that began in 2013. Last year, the Hong Kong Exchange placed second behind New York as the world's biggest IPO market, raising US$21.7 billion.

While 2013 started off with high expectations, the IPO market lost steam in the second quarter as global economic concerns made investors a bit jittery. The stock market weakness impacted the appetite for new listing resulting in nearly US$1.8 billion worth of listings being postponed in June.

However, by the end of the year the IPO market rebounded with new listings in December generating as much volume as the first six months of 2013 combined. For 2014, investors are anticipating companies to raise an even greater amount of capital as KPMG and PwC forecast approximately 100 new listings will raise up to US$32.2 billion as well as a greater number of small- and medium-sized companies listing.

Leading the IPO market is Li Ka-shing’s empire which is expected to raise CNY120 billion from two spin-offs. Even though the billionaire’s first major IPO of the year, Hong Kong Electric, received lukewarm reception from investors as it fell 2% on its trading debut, investors are still anticipating the spin-off of Hutchison’s AS Watson retailing unit.

The deal could raise up to US$13 billion in what may become Asia's biggest initial public offering in three years as well as the world’s largest-ever retail IPO. Other high profile deals expected for the year include industrial pork giant Shuanghui International, which is planning to raise up to US$6 billion; shopping mall group China SCP Group, which is aiming to raise about US$1b; China Guangfa Bank which is expected to raise as much as US$5.5 billion from a concurrent IPO in Hong Kong and Shanghai; and one of the most anticipated IPOs which has yet to confirm where it will list, Chinese e-commerce giant Alibaba Group Holdings, which is expected to raise more than $10 billion.

Possibly giving an additional boost to the Hong Kong market is the recent decision the United States Security and Exchange Commission made regarding banning Chinese affiliates of the four biggest accounting firms from working on US-listed companies for six months. The decision could push more Chinese companies to list in Hong Kong as the ruling reinforces perception issues of the SEC as being unfriendly to Chinese IPO’s.

Already, Chinese companies frequently complain about compliance costs and resources required that are generally somewhat higher for a PRC business listing in the U.S. than for one listing in Hong Kong.

On the cautionary side, market volatility has been cropping up as the Federal Reserve continues to scale back its monetary stimulus program and China factory activity has been disappointing which could adversely impact investors’ appetite for risk. Last month investors got a bit skittish as a wave of panic hit emerging markets on worries over capital flight.

This resulted in 2014 starting off in negative territory which created further concerns as January is often considered a barometer for the year. For the month of January the Hang Sang Index was down 5.2% for five month low while the S&P Asia 50 index, a measure of the performance of 50 major companies across Asian markets including Hong Kong, Korea, Taiwan and Singapore, was down by 6.24%.

While the overall outlook is still very positive, the determining factors of the market’s performance lie on the success of three or four larger deals expected during the year, the timing for the Federal Reserve’s tapering, and China’s measures to further economic growth.