Capitalism is back – alive and kicking. That, at least, is the impression created by the rush of companies debuting on the world’s share markets.
Global "initial public offering” volumes have already exceeded $38bn in 2014, more than twice as high as in the same period last year. European IPOs have tripled, according to Thomson Reuters data.
Twitter debuted late last year; the IPO highlight of 2014 is likely to be the US listing of Alibaba, the Chinese ecommerce giant, which might be the biggest yet.
IPOs are the lifeblood of equity markets: they replenish share supplies and invigorate investors – as well as provide finance for companies to expand. So their revival is a sign of a return of Keynesian “animal spirits”, or commercial risk-taking, and of financial markets functioning efficiently again after almost seven years of crises.
Or is it? Amid all the hype that makes IPOs so headline grabbing, there are reasons for caution. The animal spirits may be more those of bigger companies, bankers and financiers, rather than the smaller beasts in the jungle that will provide the economic growth of the future.
Here is the FT article.
A shrewd journalist said to me many years ago: “The main reason why CEOs float companies is because they can get more for them than they are worth at the time.” Yes, that may sound like a cynical comment but it also contains a ring of truth.
A less contentious observation is to point out that IPOs usually peak around the same time as the stock market. Managements respond to the opportunities created by frothy, generously valued markets.
In other words, a big increase in IPOs are a contrary indicator. However, investors need to be careful about reducing their portfolios too quickly because in a strong bull market fuelled by easy money, IPOs can go on rising for several years.
A significant IPO withdrawal is often a more precise contrary indicator, particularly if there is nothing wrong with the company. It reaffirms that the market is illiquid and investors pessimistic. It can also trigger a panicky reaction. This is a wakeup call for the country’s central bank which may respond by increasing liquidity.Back to top