|»5 Minute Wrap Up by Equitymaster|
On This Day - 10 DECEMBER 2011
Should you invest in IPOs in a volatile market?
In this issue:
Will Italy be able to get back on its feet again?
Will Euro die faster than the Dollar?
Will China now replace US as the new superpower?
Know all that's going on in the global markets through the free daily financial e-column The Daily Reckoning.
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Since then the IPO market has been going through choppy waters and while the going was good last year, the trend seems to have reversed this year. According to Ernst & Young, Indian companies mopped up barely US$ 1.14 bn through IPOs till November this year. This is around an 89% plunge over last year. The number of IPOs was less than half of that last year, and stood at 34 in the first 11 months of 2011 as compared to 71 in 2010. The deepening debt crisis in Europe and the lack of solution thereof, rising inflation and slowdown in growth in India and policy paralysis in the government have spooked stock markets and contributed to the increasing volatility. This has then made companies wary of raising capital through the IPO route. PSU share sales as part of the government's divestment programme have also petered out. Not surprisingly, this phenomenon is not unique to India and has been seen in Asian as well as the global stock markets with the number of deals and new issues drastically reducing.
The problem for Indian companies is that debt is not cheap either. With inflation remaining perisistently high, interest rates have risen and this has made cost of debt dearer. Further, foreign currency loans have their own set of problems with the rupee depreciating at such a steep pace.
Having said that, businesses need to grow and growing businesses need capital. The crux here is that those wanting to access capital through IPOs need to price them reasonably. Readers would do well to recall that last year saw the government divest their stake in a number of PSU companies. Many of these companies had strong growth prospects but the icing on the cake was that quite a few were attractively valued and held the potential of strong returns for investors. We believe that this holds true even in a volatile market. As long as companies have sound business models with a strong management and reasonable valuations, there is no reason why investors should not invest in these companies whether they are raising capital for the first time or are already listed on the stock exchanges.
What made matters worse was the sudden vanishing act performed by nearly US$ 1 bn worth of funds from clients' accounts that is supposed to be kept segregated from the firm's money used for making risky bets. And what the clients are getting from the CEO of the firm when asked about the whereabouts of their hard earned money? Well, nothing more than a shrug of the shoulder and a terse 'I don't know the location of the funds'. If you are thinking that Mr Corzine may land himself in prison after all this, banish the thought. He may still be able to go scot free. No wonder, the US society is in a state of turmoil right now.
The thing is that the project is a brilliant idea to ensure that people have a single identification card that takes care of their social security, their voting rights and everything in between. Thus, the question that one needs to ask is whether the concerns raised by politicians genuine? Or are the so called 'intelligent' politicians threatened by Mr Nilekani's presence. He is after all not a politician but an ex-bureaucrat. Nevertheless, by the looks of it, another good proposal of the government is headed down the drain.
Unfortunately, the damage does not stop here. Given that European economy is one of the biggest, the ripple effect will spread far and wide. It could send US economy in the reverse gear that has recently managed to improve in the last few months.
However, the Indian stock markets were down 3.8% during the week after the government lowered the full year Gross Domestic Product (GDP) growth target and disclosed that meeting the fiscal target would also prove to be a challenge. Apart from this, decision to put Foreign Direct Investment (FDI) in multi-brand retail on a hold also made investors jittery.
Amongst the other markets, Brazil was up 0.6% while France was flat with gains of 0.2%. However, Singapore and China lost considerable ground and ended the week on a negative note.
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