Markets Update: Constructive Conditions for Equity Issuers and Investors

Episode Summary

Executive Summary: Lizzie Reed describes a resilient U.S. equity and equity-capital-markets rebound in mid-2020, driven by improved investor risk appetite, ample cash, strong retail participation, and supportive hedge fund positioning. She argues that financing conditions have shifted from defensive balance-sheet raises to more offensive capital-raising, with record issuance, healthy IPO/follow-on activity, and no signs of fatigue heading into earnings season and the November election.

Main Topics: Market recovery and volatility normalization (Priority: 5/5): Reed explains how equity markets recovered sharply from the March selloff, with valuations, indices, and the VIX all moving back toward more normal ranges, though volatility remains elevated versus history. Investor positioning and technical support (Priority: 5/5): She attributes the rally to cash on the sidelines, retail buying, mutual fund redeployment, and constructive hedge fund/systematic positioning, which together created persistent demand for equities. Broadening market breadth (Priority: 4/5): The recovery initially concentrated in a few names but broadened into cyclical, financial, and value sectors, which she views as a healthier sign for the market. U.S. equity capital markets strength (Priority: 5/5): Reed says issuance conditions are constructive for issuers and attractive for investors, with capital markets functioning well across IPOs, follow-ons, convertibles, and private investment into public equity. Shift from defensive to offensive issuance (Priority: 4/5): Early-pandemic deals were focused on liquidity preservation, but as conditions improved, issuers began raising capital for growth, M&A, and proactive strategic moves. Outlook for the second half of 2020 (Priority: 3/5): She expects activity to remain strong, with earnings season and the U.S. election as the key catalysts to watch rather than any immediate slowdown in issuance.

Key Arguments: Equity markets have recovered impressively because risk appetite returned and liquidity remained abundant despite macro uncertainty. Mutual funds had elevated cash balances, giving them room to redeploy capital into equities and new issuance at attractive levels. Retail investors were a major support for the recovery, with unusually high trading activity and continued net buying of U.S. stocks. Long/short hedge funds de-risked early in the downturn and then benefited from the rally without being forced into widespread short covering. The rally has improved in quality because it broadened beyond a few stocks into cyclicals, financials, and value names. U.S. equity issuance is booming because the market is functioning well and issuers can access capital efficiently across multiple product types. Capital raising has shifted from defensive balance-sheet support to offensive uses such as funding growth, building cash, and preparing for M&A. There are no clear signs of fatigue in equity capital markets because supply is being met by strong investor demand and solid aftermarket performance. The near-term outlook depends mainly on earnings season and the November election, but Reed does not expect a meaningful slowdown in activity.

Data Points: S&P 500 P/E multiple end-2019: 21x - Starting valuation level before the 2020 selloff S&P 500 P/E multiple at March low: sub-18x - Valuation during the March equity drawdown S&P 500 P/E multiple recently: closer to 22x - Recent recovery in valuations Major equity indices recovery: 35% or more - Recovery off the March 23 lows VIX intraday high: 85 - Peak volatility on March 23 VIX current level: low 30s - Recent volatility level at time of recording Five-year average VIX: low teens - Historical comparison for volatility U.S. mutual fund cash increase: 0.6% of assets - Increase from December 2019 to March 2020 Households share of U.S. equity market: approximately 36% - Largest ownership segment Active mutual funds share of U.S. equity market: approximately 17% - Second-largest ownership segment mentioned Households plus active mutual funds: approximately 53% - Combined share of U.S. equity market ownership Hedge funds share of U.S. equity market: approximately 3% - Small relative share of market ownership GS retail favorites basket YTD: up 15% - Indicator of retail-supportive market names Top four retail brokers activity in April: 5x larger than median month since 2008 - Single-name share trading activity 2020 YTD equity issuance: $186 billion - Common equity plus convertible offerings 2020 YTD issuance growth: up 65% year-over-year - Compared with prior year Q2 issuance: $133 billion - Represents 72% of year-to-date issuance May 2020 U.S.-listed equity-related offerings: $78 billion - Busiest month in history for this market Previous monthly record: $66 billion - December 2009 prior high June month-to-date issuance: $30 billion - Activity had not slowed as of recording IPO count last week: 9 IPOs - Recent normalization in IPO activity IPO notional volume last week: $5 billion - Total volume of those IPOs Average file-to-offer discount for marketed follow-ons in 2020 YTD: 8.9% - Issuer pricing metric Change versus 2019 YTD file-to-offer discount: 0.4% higher - Shows pricing remained relatively stable despite volatility Average IPO aftermarket performance YTD: up 17% - Investor return after pricing Average marketed follow-on aftermarket performance: up 5% - Investor return after pricing

Pivotal Quotes: "What we’ve observed in the last couple of weeks is a shift in the positioning of the issuer base." — Lizzie Reed: Describes the move from defensive liquidity raises to more offensive corporate financing activity "There are robust supply that has been simply met with ample investor demand." — Lizzie Reed: Explains why there are no signs of fatigue in U.S. equity capital markets "At this point in time, we don’t anticipate any change in the pace of activity." — Lizzie Reed: Her outlook for continued strong issuance in the second half of 2020

Implications: The transcript suggests U.S. equity markets and ECM remained highly functional in mid-2020, with liquidity, retail participation, and broad demand supporting issuance. Investors should watch earnings and the election as the main near-term risks/catalysts.