Unpacking the Investment Banking outlook in Asia Pacific

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Mark Fiteny: Hi, you're listening to What's The Deal?, our investment banking series here on J.P. Morgan's Making Sense podcast channel. I'm your host, Mark Fiteny, head of TMT and new economy investment banking for Asia Pacific at J.P. Morgan. And today I'm joined by Paul Uren, our head of investment banking for APAC. Together we will discuss some of the key themes and trends that are shaping the outlook for investment banking in the region as we move through the second half of the year. Paul, thanks for joining me.

Paul Uren: Thanks, Mark. It's great to be here with you in Hong Kong.

Mark Fiteny: To kick things off, let's start with the broader economic backdrop. It's been an interesting first half. After what may have seemed like a continuation of last year's challenging market conditions to start off the year, equity markets have been more recently bullish. There have been expectations of a more constructive rate environment and ongoing policy and exchange efforts across the region to encourage activity. Overall, it does feel more positive. How are our clients looking at the current environment?

Paul Uren: As you know, we cover clients and have investment bankers on the ground in 13 different markets in Asia, and every country's unique. But I do think there are some general themes that we can point to. The first thing is that clients feel like the worst is behind them in terms of business and economic conditions. The second thing is that while stock prices haven't been as strong as they have been in the US, most companies have seen their stock prices trend upwards this year. That's certainly improving board and CEO confidence. And then, the third thing I'd touch on is that with more clarity on the trajectory of interest rates broadly, clients are generally of the view that they should get on and start preparing for transitions, whether that's M&A or capital markets.

Mark Fiteny: And given that backdrop, how are you guiding your clients accordingly?

Paul Uren: Look, as you and I both know well, there are lots of issues to navigate throughout the different markets in Asia Pacific, not just economically, but also with many elections in Asia and around the world this year. And also an increasingly complex geopolitical environment. More broadly, in M&A we're advising clients to get prepared so they can best assess the optimal time to launch sale processes, but also advising them, and helping them being more creative with tailored or bespoke processes that we can use to help derisk outcomes.

Mark Fiteny: And how has that translated into activity across the investment banking industry so far this year?

Paul Uren: Well, look, it genuinely has been a tale of two quarters so far this year in Asia Pacific. Uh, if you go, go back to the first quarter, when we look at the data for the entire industry, known as the APAC addressable wallet, the first quarter was down about 15% from the equivalent period in 2023. However, we saw a really strong recovery in the second quarter, with the second quarter up around 40% on the equivalent period last year. As a result, for the first half the investment banking industry in Asia has seen the overall fee wall at up around 10%.

Mark Fiteny: You had noted that you have bankers on the ground in 13 different countries. It's clear that Asia's not homogeneous, and we're seeing clients broadly more, more active, but a few markets have continued to stand out in their strength, India and Japan as examples. Can you talk a bit about what you're seeing in, in these major markets?

Paul Uren: Yeah, well, look, both India and Japan have been key beneficiaries of capital flowing from other markets such as China. And if I start with Japan, you know, that has become the largest and most active investment banking market in Asia Pacific, representing around 35% of the overall investment banking market. In Japan so far this year, investment banking activity for the industry is up around 20%  on 2023. There are a number of factors driving that. One is corporate governance reforms that have been implemented in Japan and are driving much greater focus on shareholder valueThat's leading to more activity. With stock prices having rallied in Japan over the last couple of years, we're seeing renewed confidence on the part of our Japanese corporate clients to pursue M&A outside of Japan. Our teams are very active across many sectors, including FIG, healthcare, industrials, and energy, as well as TMT, working with Japanese acquirers as they look to expand internationally.

Mark Fiteny: All right. And why don't we move on to India?

Paul Uren: So with the election in India now behind us, we expect to see continued pickup in activity. The Indian equity market's become much more developed and sophisticated, with participants from both the local market but also institutional investor focus internationally. There's a large pipeline of IPOs, including a number of very large IPOs, and we can see India becoming one of the most important IPO markets globally.

Mark Fiteny: And I did want to look at China. After a quiet stretch, we've actually seen a flurry of activity largely centered around opportunistic financing and portfolio management. What is your outlook on China for the near and medium term?

Paul Uren: Yeah, the investment banking market in China have been quiet throughout 2023 and the early part of 2024, given the complex economic picture in China, and in particular concerns about the real estate market. With more policy support in China that's helped lead to a rebound in Chinese equities, and therefore more opportunities have opened up for our corporate clients. A number of our clients have been very quick to address financing needs with equity or equity linked transactions, and we expect to see more of that activity in the coming months. IPOs were historically a very important part of the Chinese and Hong Kong markets. IPO activity in Hong Kong and China remains limited, but the pipeline is building. We expect to see some high quality companies come to market soon, and the success of those IPOs will create momentum for more IPOs to follow in 2025.

Mark Fiteny: So, if we look at it on a sector level, where's the activity and what are some of the key themes you're seeing?

Paul Uren: Yeah, there's a few key areas that I'd call out. The first one is energy transition, where we're seeing continued investment across parts of the EV supply chain and in renewable energy, where countries like China really do lead the world. The second one I'd call out is the ongoing strategic consolidation around the broader commodities complex, so we're seeing a lot of activity in metals and mining. And then, the third one is one that you know extremely well, which is the impact of artificial intelligence and the associated needs in a whole array of areas including data centers.

Mark Fiteny: Yes, for T&T, there is broad activity around AI transition. It's got implications on digital infrastructure, but also the broader tech supply chain, which is, uh, an important theme across multiple parts of- of the region. How are you seeing thematically,  the balance of growth and profitability as companies are- are managing their balance sheets and their P&Ls?

Paul Uren: Yeah, I think as you and I are both seeing with a number of the clients that we engage with, clients are really trying to strike the right balance between growth and profitability because they know that's what their investors, whether it's public, capital, or private capital, are very focused on.

Mark Fiteny: Yeah, it seems that growth is still paramount, but it's not growth at any cost, it's growth with a focus on what is the margin potential and what is the underlying unique economic model to show that you can actually create margins over time. Investors are not giving the benefit of the doubt, they're wanting to see it in performance.

Paul Uren: Totally agree with that, yeah.

Mark Fiteny: Paul as you're looking at private equity and financial sponsor activity, where are they focusing? What sort of themes are the sponsors looking at?

Paul Uren: Yeah, the first thing I'd say is that private equity in Asia have the same challenges as in other geographies around the world, and the return of capital to investors has been slow. I think that's hand-picked new deal activity on the buy side for acquirers, and it has set the bar very high for new deals. That being said, we're starting to see a pickup in activity.

Mark Fiteny: If you look at the dry powder relative to the activity flow, would you expect more will happen in the future than it's happened in the recent past?

Paul Uren: Yeah, if I look at our own pipeline, we're working on more transactions without private equity clients on the buy side today than we were 12 months ago. And I think there's much more in terms of desire on the part of our private equity clients to deploy capital in this environment.

Mark Fiteny: And you wrote our balance sheet for the region. How are you looking at deploying capital relative to sponsored activity?

Paul Uren: Yeah, so I think financing markets are generally supportive of private equity activity and certainly opening constructive, so while debt might be expensive relative to where it was in 2021, when you look at the cost of financing relative to long-term averages, I think it's probably in line with where it was. The other thing that I would add is that with higher growth generally in Asia, debt plays a less critical role in the capital structure. So, transactions are generally capitalized with more equity compared to other parts of the world, but, pleasingly, debt is available, and that's gonna help transactions as we look into the back half of this year into next year.

Mark Fiteny: What about the strategic backdrop? How are you seeing corporates looking at consolidation or investing for growth or managing for corporate clarity?

Paul Uren: Yeah, after a period of putting strategic initiatives on pause, we're certainly seeing corporate clients focused on value creation and deciding that they really need to get on with their M&A agenda. I think deals that have a compelling strategic rationale and enhance competitive positioning will be supported by the investment community. In some markets like Japan, we're also seeing increasing activity from activist investors, and they're becoming a really prominent part of the market. That's encouraging clients to focus on shareholder value-creating initiatives, and I'd say that overall the level of strategic dialogue that we're having with our corporate clients is much higher than it was this time last year.

Mark Fiteny: What about cross-border M&A in particular? Are you seeing a pickup in any markets that attracting attention for international inbound investors? And the same question for outbound, from Asia to the rest of the world.

Paul Uren: Yeah, Japan, India, Korea, and Australia are some of the markets that are continuing to attract strategic interest from global corporates. When we look at outbound M&A from Asia to other parts of the world, seeing very high levels of engagement on cross-border M&A, and we've helped a number of Asian clients on the buy side as they go into other markets. Cross- border M&A's usually impacted by elections, because it impacts regulatory clarity and also the approval processes. And when we have more than 60 countries holding elections in 2024, that is definitely a factor that has slowed activity to some degree. That being said, I would say the level of client dialogue remains very high, and we're encouraged by the prospects for next year.

Mark Fiteny: So it's sounds like I'm hearing three things: One is a more constructive backdrop, two is corporate is getting more comfortable with the environment that they're in, and three is your guidance is that preparation makes sense given it's not gonna be a linear trajectory being in position to be able to act when the market is ready is the best advice you give to your clients.

Paul Uren: Yeah, I think that's a good summary, Mark. You know, the world is complicated, market conditions continue to evolve. It's one of the things that I think both you and I greatly enjoy about being in Asia is the variety of both clients, but also the number of different markets to navigate. And I do think, getting prepared is the right thing for clients to do so they can execute their strategic agenda. But we feel optimistic about the outlook for the rest of this year and also into next year.

Mark Fiteny: Perfect. Thanks for joining me today, Paul, lots of great points for us to take away and for us to think about. And thanks to our listeners for tuning in to another episode of What's The Deal?.

Paul Uren: Thanks, Mark.

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