ASHOK PANDIT Equity markets have been patchy so far this year, with uncertainty over the global economic recovery and sovereign debt concerns stoking market volatility. Volumes of new equity issuance have been fairly subdued compared to pre-crisis levels as companies wait for a steadier environment before tapping markets for funding. However, while markets continue to be fairly volatile, improving fundamentals and growing interest in Southeast Asia will likely see strong demand for Indonesian equity issuance going forward. Volumes of equity and equity-linked issuance in Asia ex-Japan so far this year are markedly above the corresponding period last year, according to Bloomberg, with US$58.4 billion of issuance as at July 9 compared to $33.1 billion at the same point in 2009. This can be partly explained by a general improvement in sentiment following last years market rally, as well as expectations that the worst of the financial crisis has passed. However, concerns over sovereign credit risk in some emerging economies and uncertainty around when central banks in the worlds major economies will reduce stimulus measures in response to the financial crisis have resulted in choppy price action over recent weeks. Periods of high market volatility make it difficult for companies to issue new equity, as valuations can be affected during the marketing process and share performance after listing can suffer. These factors can make investors nervous and less willing to commit money to the market. The VIX index, a popular measure of implied volatility on the S&P 500, rose at the start of the year and then fell before volatility returned in May. Recent positive performance in global equities has shown that volatility surprises are still very much with us and may continue to be a feature of global equity markets for some time to come. It is important to note, however, that market volatility at this stage of the recovery is not unexpected, with history showing markets never heal themselves in a linear fashion. Given consensus at the height of the crisis was for the recovery not to even begin until next year, we are somewhat ahead of where we are expected to be. From their lows in March 2009, equity markets have rebounded significantly, with the Dow Jones index rising 67 percent; the Hong Kong and Singapore exchanges rising by 90 percent and 102 percent respectively; and the Jakarta Composite Index rising 128 percent, according to Bloomberg. While performance across most Asian exchanges differs quite strongly so far this year, with the Jakarta Composite Index being a clear out performer, a German banks strategists are broadly positive on Asian equities in 2010. This is particularly true for Indonesia, Malaysia and Singapore, which are expected to benefit from a rebound in domestic consumption, export demand and global economic growth. As sentiment improves, investors will start to add risk and allocate more capital to growth markets. As such, we expect Indonesia will account for a greater share of primary equity issuance in Southeast Asia going forward with the resources and banking sectors becoming the most active issuers of new equity in the coming months. Indonesias resource sector has been a particular focus for institutional interest of late. Analysts expect demand for Indonesian coal and other commodities to increase as regional and global economic conditions improve. Bank re-capitalisations will also be an important driver of issuance volumes, as institutions look to capture growing demand for credit, while preparing for potentially higher capital ratios under proposed Basel III banking regulations. A portion of the funds that flowed out of the region after the financial crisis are yet to find their way back to the regions equity markets, however, this is expected to change. We estimate that the majority of investors funds that flowed out of Asia ex-Japan during the crisis have returned, while a recent survey shows that investors in hedge funds expect to allocate more capital to the region while reducing their overall cash levels. In addition to these expected fund flows, Asias domestic institutional investor base also continues to grow, creating larger pools of money that can be distributed into the regions equity markets. This suggests that institutional investors globally are ready to put more money to work, which is good news for growing companies in Southeast Asia looking to finance themselves via equity markets. Combined with falling levels of market volatility and an improving outlook for the global economy, we see equity markets remaining a viable and attractive source of capital for Asias growing corporate sector. Jakarta Post