|»5 Minute Wrap Up by Equitymaster|
On This Day - 27 NOVEMBER 2010
Is this the end of the IPO dream run?
In this issue:
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As has been the case with bull runs in the past, companies in recent times announced IPOs by the dozen as they wanted to ride the wave of euphoria in the stockmarkets. After all, the developed world was struggling to keep its head above water. And foreign investors in their quest for higher returns were pouring into emerging markets including India to capitalise on the faster growth prospects of these economies. The general perception was that as long as the US and Europe struggled to recover, foreign money would keep flowing into India. This, despite the prices of many stocks having reached exorbitant levels. This enthusiasm spilled over to IPOs as well and the feeling was that as long as there was enough liquidity, IPOs would get oversubscribed. Even if the valuations were on the higher side.
Ironically, the global scenario has not changed. But the recent spate of scams in India has meant that Indian stockmarkets have suffered. Little wonder then that IPOs have also begun to see a slow down. Real estate companies, especially, are likely to face the maximum brunt. These companies had come out with a plethora of issues before the scandals came to light. And many more were slated to come with issues, which may not see the light of day. That said, the investment rationale for IPOs is no different from investing in already listed companies. At the end of the day, the business fundamentals have to be sound, the management strong and the valuations reasonable. Without them the IPOs do little favour to the markets.
The real estate bubble has taught the Dubai government two set of lessons. That building an economy purely through borrowings is unsustainable. And that the growth of an economy needs to be broader based. Concentrating on just one aspect could have disastrous fallouts in times of distress. We hope the lessons are taken more seriously by other economies as well.
It is good to see the ministry taking a stance on climate risk. However, we wonder if they are addressing the correct issues. It is important to remember that the same ministry had increased the mining reserves for Coal India just before the IPO. Going after infrastructure development by private companies only and ignoring the public run companies is definitely not the ideal solution.
According to experts, raising fees to be active on the exchange is a predictable move to try to calm down speculative investment. But high futures prices also point towards fundamental demand -supply factors. The world's four biggest agricultural contracts are traded in China. However, the Chinese exchanges' steps may have little effect on world commodities prices. Partly because trading is closed to outside investors.
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