»5 Minute Wrap Up by Equitymaster

On This Day - 19 JULY 2011
Is the IPO market in a state of crisis?

In this issue:
» Hedge funds catching investors' fancy
» What is fuelling the Chinese economy?
» Gold's bull run continues
» US sits precariously on the edge
» ...and more!
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What is one of the functions of financial markets? To help growing companies raise capital efficiently. However, that hardly seems to be happening as far as IPOs are concerned the world over. Indeed, going by statistics, the IPO market seems to be in a state of crisis. This is despite the fact that there appears to be no dearth of public issues waiting to hit the market. Fathom this. According to FT, almost US$ 10 bn of IPOs were pulled in Europe in the first half of the year. This has been the worst 6-month period for scrapped IPOs since at least 2005. The situation has been so grim that it has left a sour taste in the mouths of both companies and investors. There have been several reasons for this. For starters, the worsening debt situation in both the US and Europe have dampened investor sentiments in global financial markets. As a result, companies are not too enthused about raising capital. Especially in a scenario where there is so much uncertainty.

There has been considerable lack of investor interest too. Investors have been nursing a lot of grouses against IPOs. They contend that issuers and bankers are too greedy, fees are too high with no transparency, the syndicates of banks brought in to sell an issue are too big, advisers and issuers are in too much of a hurry and more importantly the IPOs are overpriced. Investment bankers, not surprisingly, are bringing out their version of the story. They are of the view that investors' expectations of prices are too low. And that they are not making efforts to assess the management of companies before the latter come out with their IPOs.

That may well be the case. But the argument that IPOs have been overpriced is not without merit. We have seen instances like these in the Indian IPO market as well. Companies and their bankers have come out with issues that have been unrealistically priced. This has been with the hope that optimistic market sentiments will justify the high price that they have been charging. But investors are also becoming a savvy lot in India at least. Earlier, the lure of listing gains resulted in money being poured into overpriced IPOs. But over time, various problems of some of these companies came to the fore, which resulted in share prices coming down. Therefore now, investors are vary of putting their money into IPOs at the drop of a hat and very rightly so! At the end of the day, whether in India or in the world markets, investors have to take into account the quality of the management, the long term growth prospects of the company and the right price before they consider investing their hard earned money into public issues.

Do you think that the global and Indian IPO market is in a state of crisis? Share with us or post your comments on our Facebook page.

 Chart of the day
When it comes to global asset allocation, the fact that equities and fixed income accounted for a significantly large chunk in Q2 2011 hardly comes as a surprise. But investors also put in money into alternative investments that accounted for around 17% of the total global asset allocation during this period. And as far as these investments are concerned, it is hedge funds that topped the list by a wide margin (almost 60% of the same). Indeed, after suffering quite badly in the financial crisis of '07-'09, hedge funds have once again begun to worm their way into investors' minds. Whether they will be able to give good returns on a consistent basis, however, remains to be seen.

*Other than equities, fixed income and cash
Data Source: The Economist

Worried about the world economy? Now here's a piece of news that will perhaps give some relief. The Economist has reported that China, now the world's second largest economy, has grown by an impressive 9.5% during the second quarter. Thus, supporters of the theory that Chinese economy will have a hard landing can go take a walk for now. Or maybe they should not. This is because while China may be growing, the source of its growth isn't quite encouraging. It is being believed that nearly 2/3rds of the Chinese growth in the second quarter has been a result of investments. Quite a huge number indeed. Furthermore, what this also indicates is the fact that credit availability is still comfortable despite the Government's efforts at tightening. Thus, with the current lending spree, China's stock of financing could well touch 185% of its GDP, up from 124% in 2007. The story that these numbers are trying to tell is very clear. It is now taking more Yuan for China to create one Yuan of GDP. Such a trend is clearly not sustainable. It will be interesting to see what gives.

Gold has indeed seen some interesting times in 2011. The yellow metal is known to have a muted trading session in the summer months. But according to gold traders, the summer of 2011 brought more sunshine for the yellow metal as it touched new highs every month. More importantly, it is the buying appetite in Asian economies, particularly India, which must be thanked for this trend. As the debt problems in the US and Europe seems to be nowhere near being sorted out, investors are flocking to safe havens. This has led gold prices to touch a high of US$ 1,600 an ounce for the first time in history very recently. Indians in particular have a newfound appetite for the metal as an inflation hedging investment avenue. So far, gold buying in India was restricted to auspicious occasions. But young and internet savvy investors here have ignored both the traditional habits as well as the buying methods. Gold ETFs are more in demand than physical gold. Thus, Indian savings and investment trends, a persistent steep inflation rate and unsound global economy could do wonders to gold prices.

US economy is on tenterhooks. And even a small shock can send it right back into recession. This is the opinion of Mr David Rosenberg, economist with Gluskin Sheff. The latest set of economic data from US has been bleak. Home prices continue to trend downwards. Unemployment has worsened. Credit growth has come to a standstill for smaller enterprises. People are no longer spending which is visible in lower consumer spending numbers. With such bleak numbers, it is only a matter of time that US sinks into another recession. And ultimately the barometer of economic health, i.e. the stock markets, will have to follow the economic trends even if the trend right now seems to be the opposite.

Continuing with the US economy, the unemployment rate in the US was just 5% at the end of 2007. This was before the financial crisis rocked the economy. But, the next time that America will see low unemployment could very well be 13 years away. For it to get back to around 5% levels, hiring needs to increase and the labour workforce needs to expand as well.

The employment is growing only slightly faster than the labour force. The Wall Street Journal reports that the employment rate would still be at a high of 8.9% in June 2012 and it won't reach 5% till December 2024. With the US economy seeing no signs of a sustained recovery, we wouldn't be surprised to see another round of monetary easing to boost sentiment.

The Indian stock markets have been trading firmly today. At the time of writing, the benchmark BSE Sensex was up by 52 points (0.3%). All sectoral indices were trading in the green except auto and realty stocks. Barring Singapore and Hong Kong, Asian stock markets were trading in the red.

 Today's investing mantra
"The book value deserves at least a fleeting glance by the public before it buys or sells shares in a business undertaking. In any particular case the message that the book value conveys may well prove to be inconsequential and unworthy of attention. But this testimony should be examined before it is rejected." - Benjamin Graham

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