Partners in Asia fear fee levels for capital markets work could fall and that firms could be forced to scale back their presence in the region as a result of the instability in Chinese share prices.

Chinese stock markets have experienced significant volatility over the first two weeks of January, with trading suspended last week after shares plunged more than 7% as the government weakened the value of the yuan to a five year low. The Hong Kong Hang Seng index also fell 3% as it felt the knock-on effects.

Partners warn that the instability is reigniting the concerns prompted by last August's stock market crash.

With capital markets work expected to continue bearing the brunt of the volatility, firms which have made significant investments into the practice could face further questions about their viability in the region.

On matters such as IPOs, which require large teams, in particular the risk is that many are left at their desk without much work to do. Furthermore, as one Hong Kong based partner points out, less work could mean more fee pressure to win the remaining mandates forcing firms to further slash already pressed prices.

Things are likely to be slow at least for the short to medium term

"When there is a less work around what you see is people working at lower rates to keep their teams busy," says one Asia partner.

DLA Piper's Singapore managing partner John Viverito adds: "Current market conditions are a bit concerning. It seems that things are likely to be slow at least for the short to medium term."

Shearman & Sterling China and Asia capital markets head Colin Law says that the presence of large underworked teams in the region, as a result of an overinvestment by firms in capital markets in 2010 and 2011, increases the likelihood of firms slimming down their numbers or leaving Asia all together.

"Capital markets is increasingly commoditised with increased fee pressure, but at the same time there are only a handful of law firms which have been broadly accepted by major financial institutions," he says.

He adds that he feels his firm is well placed to weather the storm. "If we stay focused on clients such as banks, which have high expectations on quality, we are not seeing as much fee pressure as one would see if you target only the lesser transactions," Law says.

Silver linings
Others are more hopeful about the prospects for the M&A market in 2016 arguing that while capital markets will be hit, mainstream M&A will not suffer as much, allowing firms with a broader corporate remit to carry on without too much concern.

"If companies are on growth strategies in Europe and the US then I think that will contribute to continued M&A activity in our region. In some ways the equity market volatility is a bit of a distraction," says Bakers & McKenzie Asia corporate head David Fleming.

If companies are on growth strategies in Europe and the US then I think that will contribute to continued M&A activity

In addition, many are eyeing an uptick in restructuring work as vulture funds looking for distressed debt and assets are also expected to provide a source of work for many firms. However, the extent to which these can make up for the capital markets deficit remains to be seen.

"We may see an increase in distressed M&A this year, although there have been a few times since 2008 when a number of advisers have prepared for a cycle of distressed M&A and it hasn't really occurred," adds Fleming.

"Most multinational acquirers are in reasonable financial condition. Credit is still relatively available and cheap. Corporates are also seeing the benefits of restructuring and fine tuning," he says.