Block trades find favour in Asia

Investors are selling large blocks of Asian shares in record amounts as they rush to book profits from resurgent markets.

Nearly $18bn worth of stock in Chinese and Indian companies has changed hands in "block trades" in 2015 so far - more than three times the amount in the same period last year - as shareholders take advantage of buoyant markets and improving liquidity.

Asian stocks have gained 13 per cent this year, according to the MSCI Asia Pacific index, compared with 8 per cent for the S&P 500.

The surge in sales is changing the dynamics of the market, forcing bankers to seek new types of buyers for the blocks. Fund managers are typically the biggest buyers of blocks and many missed part of the rally in Chinese stocks in both the mainland and, more recently, in Hong Kong.

The sellers' charge, meantime, has been led by private equity groups. This month Carlyle Group of the US sold its remaining stake in Hong Kong-listed Haier, the Chinese white goods maker, for $425m while China's Hony Capital raised $1.3bn from unloading a 23 per cent holding in CSPC Pharmaceutical, a drugmaker.

"If you're private equity, you can often make quick decisions whenever the valuation is right without the issues of regulatory filings and board decisions," said Jack Yee, head of block origination for Asia-Pacific at Barclays. "Companies generally take longer to make a decision but I think you're going to see some make that move quite soon."

Buyers are attracted by the opportunity to buy big blocks of shares at slightly cheaper prices than on the open market.

"[Globally] investors remain underweight the largest stocks in China and the block market will be one of the ways people can add exposure," said Jonathan Penkin, co-head of Goldman Sachs' financing group in Asia-Pacific excluding Japan.

Less typically, Hong Kong bankers report buying from companies and the region's wealthy tycoons, simply interested in playing the market. Chinese insurers have been more prevalent, particularly buying Chinese stocks.

Supplementing the private equity sales are company sales and privatisations, including the Indian government unloading $3.7bn of shares in Coal India.

Last week, Japan's Daiichi Sankyo sold its 8.9 per cent stake in Sun Pharma for $3.2bn while last month, Chevron's $3.6bn sale of its half-stake in Australia's Caltex became Sydney's biggest block trade.

Block trades have also proved a boon for investment banks who prefer rapid-fire deals - in the most extreme cases, bankers will bid for a block after the market closes and expect to complete the sale by the open the next day.

"I'd far rather have a couple of guys tied up on a block trade for perhaps a couple of days than put four on an IPO for six months where the profit isn't certain," said one regional investment banking head.

Banks typically bid for blocks at a discount to the last market price in the expectation they will sell them on at a smaller discount, taking the spread as their fee. While the short-term nature of the deals limits the risk of market moves against the bank's price, an unexpected market fall can still leave a bank with a lossmaking position.

Fierce bidding for the blocks has narrowed the discount to the market price, according to bankers - increasing the danger of a deal turning sour for the bank.

"From a risk perspective, banks may feel able to be a little more aggressive in pricing than normal, knowing the liquidity environment is such that there is more chance of being able to trade out quickly even if you get the market wrong," said Hemant Sabherwal, director in Deutsche Bank's Asia equity capital markets team.

Liquidity and the general market mood means few banks, if any, are yet thought to have been left holding lossmaking positions. Any signs of companies preparing to tap the market is only likely to increase confidence further.

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