Keep your options open in volatile times with London Stock Exchange Group’s International Order Book (IOB)

IOB’s diversity and flexibility helps investors respond to market uncertainty

Every portfolio manager will consider an investment idea from many angles before moving to implementation. In unpredictable market conditions, most will pay particularly close attention to their choice of vehicle for the idea, assessing room for manoeuvre should circumstances change. So far in 2020, portfolio managers have found the liquidity, diversity and flexibility offered by the global depository receipts (GDRs) available on the London Stock Exchange Group’s International Order Book (IOB) to be highly valuable as they adjust and update their strategies.  

Arguably, agility will become even more important. The coronavirus pandemic has wreaked havoc on financial markets, upsetting expectations and valuations across asset classes. High levels of volatility in pricing and liquidity have subsided since Q1, but there remains little consensus on the timing or pace of the global economy’s exit and recovery from lockdown. For portfolio managers,  cost-effective access to liquidity in volatile and stressed markets and availability of a wide range of instruments and counterparties, will remain vital.

Market shocks

As equity indices fell 25-30% at the end of Q1, other asset classes experienced their own traumas, with oil prices plummeting.  

These volatile conditions prompted an unprecedented surge in value traded on the IOB. As market participants rapidly adjusted their portfolios in light of asset-price shocks across securities and commodities, IOB trading volumes reached US$12.5 billion in March, its highest monthly turnover since April 2015, including a new daily record (US$1 billion).

The ongoing need for market participants to recalibrate their energy exposures was a key factor behind strong second-quarter volumes too. In June, five of the IOB’s ten most-traded securities were Russian energy firms.

Overall, the IOB saw a one-third increase in on-book value traded to US$48 billion in the first half of 2020, accounting for 5.4% of all LSEG secondary equity market trading in H1 2020. Strong demand has continued into Q3, with total on-book value traded standing at US$54.2 billion, 28.9% higher than the same period in 2019.

Crude oil futures recovered to around US$40 per barrel in June and July, rising from the lows of April and May, but still nowhere near pre-crisis levels (US$60-70). With OPEC’s production agreement due to end in August, freeing producers to ramp up volumes, there is scope for further uncertainty – and potential need for portfolio adjustment – if major economies, notably the US, struggle to take decisive steps toward recovery.

Liquidity and diversity

The IOB will continue to offer an important channel to investors looking to rebalance their portfolios in response to oil-price developments. But its appeal to portfolio managers also lies in a wider array of investment options and opportunities.

To continually stimulate market activity, the IOB has always prioritised liquidity and diversity. The former – deriving from size of issue and depth and breadth of counterparties – ensures market participants can enter and exit positions cost effectively. The latter offers choice of issuer, providing valuable investor optionality when refining and repositioning portfolios.

The IOB ranks second among global exchanges in capital raised via depository receipts, with US$69 billion raised since 2000. Indeed, the IOB is an unrivalled gateway to emerging markets investment, offering exposure to growth stories around the globe. China Pacific Insurance Company (CPIC), for example, listed its GDRs in London on 17 June. The US$1.8 billion listing – the largest debut in London since AIB in June 2017 – is facilitated by the London-Shanghai Stock Connect scheme, launched in 2018 to allow Shanghai-listed companies to add a secondary listing in London and vice versa. Investors’ positive reception augurs well for other stocks already in the pipeline.

Similarly, international investors have displayed an increased preference for investing in Indian growth via London over the past decade, partly due to complexities in the local custody chain. The IOB experienced a particularly strong uptick in trading in Indian GDRs in March and April, mainly driven by portfolio investors seeking to hold Indian stocks in US$-denominated GDRs due to pandemic-related currency uncertainty and the falling Indian Rupee. Strong demand has continued for Indian GDRs, trading in which grew 70% month-on-month in July and was 379% higher than 12 months ago, including US$551 million of trading in Reliance Industries, representing an 805% year-on-year rise. In July, Indian GDRs accounted for 10.2% of all IOB trading.

But the IOB’s reach extends well beyond the BRICs. In the first four months of 2020, we saw a 174% year-on-year increase in value traded in Kazakh GDRs to US$235 million, with the Halyk Savings Bank the most traded security, followed by Kazatomprom the biggest uranium company in the world. The same period also witnessed a 57% year-on-year increase in turnover of Egyptian stocks, to US$204 million.

Simplicity and convenience

As well as offering the deepest GDR liquidity in Europe, we support execution quality by catering for multiple trading channels and strategies. The IOB accounted for 84% of all lit trading in GDRs in Europe in Q1 2020, whilst LSEG’s Turquoise MTF captured 40% of dark trading, making it the leading dark GDR venue.

The execution quality of midpoint dark trading has been increasingly evident in recent years, and became more so amid the first quarter’s market turmoil, when market participants sought to trade in large size, as quickly and as cost effectively as possible. This played to the strengths of mid-point pegged orders, which allow large-in-size orders to rest in the Turquoise Plato’s dark order book for a mid-point match.

Demand exploded in Q1 2020, with a 500% quarter-on-quarter rise in the value of IOB securities traded via mid-point pegged orders. On 24 March, 25% of orders for Nornickel, the most heavily-traded IOB security, was traded via mid-point pegged orders.

Of course, sometimes a direct large exposure is not the right option, especially when hedging an existing position. To this end, we have worked closely with FTSE Russell to develop the FTSE IOB index. Containing 124 GDRs with a combined US$1.7 trillion market capitalisation, this weighted index is a highly convenient and cost-effective way to gain exposure to some of the world's fastest-growing markets.

Neither the impact of the pandemic nor drivers of uncertainty in energy prices have yet dissipated. Both retain their potential to surprise market participants, prompting the need to further adjust their perception of risk and return. As portfolio managers assess the investment landscape, we believe London has several well-established advantages as the access point of choice, from its overlaps with the trading day in North America and Asia, to operational resilience and network breadth. But we will also work in partnership, continuing to innovate, to provide liquidity and convenience, and to help keep your options open.  

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