Londons markets remained open and robust in the face of COVID-19 conditions. But at the time, there were questions about how the capital markets would respond to this traumatic shock for the global economy. Over this period, these questions have been answered and vital confidence provided.

Londons experience and capabilities as a mature, adaptable and innovative international finance centre have come to the fore, providing support to growth companies and multinational corporates as they seek to strengthen their balance sheets and liquidity positions, and to sovereign nations and multilateral agencies, as they respond to the economic and social impacts of COVID-19.

Vitally, the second quarter of 2020 has been notable for the robust participation by issuers and investors. Long-term capital has been delivered with efficiency and speed. This is reflected in the remarkable range of fundraisings: from follow-on equity issues that have raised between 5m and 2bn to social bonds to tackle COVID-19; and the GDR (Global Depositary Receipt) listing of China Pacific Insurance (Group) utilising Shanghai London Stock Connect.

London has shown itself to be a market that knows how to operate, even in such a changed environment. Its unique liquidity features have been optimal for issuers and investors in these fast-moving times. And, as the ecosystem has rapidly adapted, so capital has been readily available.

In the first half of 2020, 23.7bn has been raised in London through IPOs and follow-ons. Seven of the top 20 largest European transactions since 1 March have been executed on London Stock Exchange, with deals in London accounting for 43% of total capital raised across Europe during this period.

London stands out as Europes capital of recapitalisation. Since 1 March, 249 follow-ons have raised a combined 17.4bn. They ranged from 5m to 2bn, highlighting the sheer range and scale of capital that could be raised in a very short time.

Capital raising has happened quickly often taking about one week. They have been orderly and have been executed with a level-headed approach to discounts. Since 1 March, the average discount to last close for transactions above 5m has been 5.3%. The accelerated bookbuilds of some companies - such as Asos, SSP and AutoTrader were raised at a slight premium. The subsequent average price performance of 5m+ transactions since 1 March has been positive - up 8.6%.

The effects of the pandemic will continue to reverberate. Uncertainties remain. However, companies can focus on their future with the knowledge that the public markets are robust, responsive and able to support them.

As a result, companies can begin to look further ahead. Discussions about IPOs are back on the table. Some of these plans had been put on hold as a result of the volatile market conditions. But not all. Some companies are looking at their business and assessing their capital structures and how they want to take their business forward

Companies that had previously been considering alternative sources of finance in the private markets, involving greater debt levels and time-limited exit strategies, are re-evaluating. The attractions of a permanent capital structure in the public markets has brought some to look at the IPO process.

AIM features in many of these conversations. Unsurprisingly. The most successful growth market in the world, AIM accounted for 68% of all IPO and follow-on capital raised in Europe in the first half of 2020. In total, there were 200 deals, raising 174m through IPOs and 2.8bn in follow-ons. Eight of the top 10 European growth market equity transactions over the first half of the year took place on AIM.

AIM also celebrated its 25th anniversary in June. Since its launch, it has helped over 3,800 companies raise a combined 118 billion, supporting companies throughout changing business and economic cycles. This continued access to capital is particularly important today helping to support business in the recovery from the impact of the COVID-19 pandemic as firms look not only to strengthen their balance sheets but to fund innovation and growth.

There has been a similarly strong response from Londons debt capital markets. In the first half of 2020, 521 bonds were issued, raising $358bn. This represents a three per cent increase in issuance compared to the same period in 2019.

Much of this issuance has come from international issuers, including sovereigns, corporates, financial institutions and supranational bodies. They account for 48% of the amount raised and 59% of the number of bonds issued from the beginning of March.

Strong growth has also come from UK incorporated issuers. The amount raised by these issuers grew by 23% compared to the same four months in 2019 ($112bn in 2019 vs $138bn in 2020) while the number of bonds grew by 19% (113 in 2019, 135 in 2020).

The largest UK corporates to issue bonds included Tesco, BAE, National Grid, BP, GSK, Diageo and SSE, while financial institution issuers included Bank of England, Coventry Building Society, Nationwide Building Society, L&G, Phoenix Group, Barclays, RBS, and Lloyds Bank.

The average maturity of the bonds increased as well. The bonds issued during this period in 2019 had an average maturity of nine years; that grew to ten years in 2020. Most of the bonds issued had a maturity in the three to ten-year range with a few 30-year maturity tranches as well, showing an interest in securing funding for both short- and long-term activities.

The above information was obtained from the London Stock Exchange press release of 16 July 2020.

Q) Analyse how the market micro-structure theory aims to explain stock price formation and evaluate how it differs from the efficient market hypothesis. [15 marks]