The sentiment on Bay Street these days is something akin to shell shock. Just one week into the new year, it seems obvious that the market rout everyone wanted to leave locked away in 2015 found a way to resurface.
After a dismal end to the year, in which morale plummeted as deal flow dried up and investors took piles of money off the table, it took just one day for China's new stock market circuit breakers to wreak havoc in 2016. Now, few people seem capable of thinking straight. Too many conversations centre on how these are the end times.
A gentle reminder for anyone struck with a case of these Bay Street blues: This, too, shall pass. Too many people in capital markets grow terrified when they can't see the next deal, forgetting there will always be ebbs and flows. Something new will come along. It always does.
And as rough as the next six months or year might look, no one should forget the bull market Canada just emerged from. The market sentiment for new deals in the first half of 2015 was virtually as good as it gets. People couldn't believe how busy it was – too busy, even. The glory of the income-trust days had finally returned, albeit in a different form.
This doesn't apply to everyone. Smaller, independent firms have suffered through the mining supercycle and then the energy boom and bust. Over the past six months, a number have succumbed to market pressures because there just isn't enough work to go around.
This is tough for affected employees, and also sad for the broad Canadian market. Capital markets need a full ecosystem to be successful. The big, bank-owned dealers aren't designed to advise smaller companies. These firms, particularly those geared toward commodities, often graduate from dealer to dealer as they grow until they reach the banks – or at least one of the bigger independents.
The downturn also casts a shadow over Canada on the world stage. The Toronto Stock Exchange is known globally for its commodity expertise, which made foreign companies want to list here. As they attracted capital, more Canadian financial services would benefit. That story is over, at least for now.
Beyond the independents, it can be dangerous to paint the entire capital markets industry with the same brush. What drives derivatives fees isn't necessarily correlated to more mergers-and-acquisitions advisory work. But there are at least some broad markers that suggest there was more than enough to eat last year to keep bellies full during a long hibernation.
Initial public offerings soared last year, totalling more than $5-billion, including a $1.83-billion deal to privatize Hydro One. And as quiet as the commodity market was for mergers and acquisitions, Canadian companies still participated in $279-billion worth of merger and acquisition activity, according to Thomson Reuters.
Looking out over the next year, there are real reasons to be concerned. The Chinese government has all but admitted it isn't comfortable with letting its market correct, even if that's what the country needs to deflate any bubbles. The Chinese economy – the world's second largest – has also been fuelled by a debt binge, and should it end, the adjustment could be rough. Credit crises are always more severe than equity ones. See 2008 for proof.
Here in Canada, the central bank's latest business survey, released Monday, said business hiring and investment plans are at their weakest levels since 2009. It isn't just Bay Street that's downbeat: Corporate executives seem to be preparing for a long winter, too.
Yet with each passing year, we seem to grow more myopic, not appreciating that there will be a rebound. Even after the depths of the 2008 financial crisis, deal flow roared back. Yes, the first wave was more geared toward debt financing than mergers and acquisitions, but so long as advisers are well diversified, fees can be made. This is the time for everyone in capital markets to show they have mettle – from deal advisers to fund managers to traders. It's easy to make money in a bull market. What matters now are smart, innovative ideas that prove those on Bay Street are worth the big bucks.