Securities lending market update
The closing days of summer are a good time to look forward at what’s expected this fall in securities lending markets. In the Summer 2011 edition of Trade Talk, we examined changes in the supply side of our business – specifically, how changes in asset allocation at funds and plans result in changes to revenue. Now, we will turn to changes in borrower demand and how these can drive revenues in calendar 2012.
On the back of the Muddy Waters’ report on Sino-Forest (which currently looks to be more accurate than many top managers would have predicted), there has been a significant uptick in borrower interest in many foreign-listed Chinese companies. While this includes many reverse-takeover listings on exchanges like the TSX, it also includes American Depository Receipts (ADRs). Chinese ADR’s have become a significant revenue-driver in lending markets, with very interesting supply/demand characteristics. On one hand, the share prices of select well-managed companies may be overly depressed and present worthy buying opportunities. On the other hand, issues with transparency and reporting accuracy continue at many companies. Until there is a greater certainty around access to reliable information, we expect to see these opposing pressures continue to create borrower demand for Chinese companies.
Solar energy stocks have also generated significant borrower interest. Companies like First Solar and Sunpower have underperformed the market since hitting 52-week highs earlier in 2011, and have attracted significant demand from borrowers. For long-managers that believe solar energy stocks have long-term growth potential, this scenario may present good buying opportunities, but in the face of global market uncertainty we have seen short-term price pressure. Sunpower saw particularly strong activity as a result of being a tender-offer target of Total SA, who picked up 60 per cent of the outstanding shares.
There has also been hype in the initial public offering (IPO) space, with LinkedIn being a good, high-profile example. As with merger/acquisition demand, IPO demand from borrowers usually stems from an expectation that after the hype dissipates, it’s not uncommon to see pull-back: many companies fall back in line with the original issue price. Our borrower clients often look to stock up on shares in anticipation of a price contraction as markets rationalize the value of the original IPO.
With the stable-market demand we spoke to in the last issue (CAD Bonds, index equities, global equities, and so forth), “specials” like Chinese companies, solar stocks and IPO stocks can drive significant lending returns for the funds that hold them. In short, the long-term bias of investment manager teams can be augmented by taking into account the short-term directional views of the opposite side of the market.
By Jeffrey Alexander, director, capital markets
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Trade Talk® is provided for general information purposes only and CIBC Mellon Global Securities Services Company, CIBC Mellon Trust Company, CIBC, The Bank of New York Mellon Corporation and their affiliates make no representations or warranties as to its accuracy or completeness. Readers should be aware the content of this publication should not be regarded as legal, tax, accounting, investment, financial or other professional advice nor is it intended for such use.
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