By Bob Huxford
Yesterday the Financial Times reported that Half of this year’s big IPOs are trading below listing price. The story suggests this is a terrible outcome for IPO investors, but if the Efficient Market Hypothesis (EMH) is to be believed, you might expect roughly half of IPOs to be trading below listing price and half above. This is because all available information in the market at the time of IPO would have been correctly processed by investors to provide an accurate valuation on listing, and stocks would move either up or down in proportion to any additional information that came to light since.
The FT’s point is not entirely unreasonable given that markets have performed exceptionally well this year. However, it does make its point by selecting a particular group of IPOs. Namely, those above $1bn market cap, where there’s more potential for runaway values in the first instance; in the middle of a bull market fuelled by a huge surge in the money supply. Also, it takes IPOs from across the globe, including in China, where stocks haven’t had a great year at all. All of China’s IPOs are underwater, with the Hang Seng down 10.5% on the year and 23% down since February. It was then that the Chinese government announced a crackdown on big business, with anti-monopoly investigations leading to big fines for companies like Alibaba and international investment quickly being withdrawn from the country.
If we look closer to home however, the UK has actually seen its 2021 IPOs perform fantastically well. Data released by the London Stock Exchange this month shows that a full 60% of LSE Main Market IPOs are trading above their listing price and small caps fare even better with two thirds of AIM listed companies ahead. This is a very strong performance given the EHD might suggest a 50/50 split. Over the pond, that’s just what we’re seeing with the New York Stock Exchange, reporting 50% of its IPOs trading ahead year to date and 48% of Nasdaq businesses.
In addition, UK 2021 IPOs are trading well ahead on average share price performance. LSE Main Market stocks are up 25.4% year to date and AIM stocks are not far behind up 21.3%. Again, this compares well against the US with the Nasdaq’s 2021 IPOs seeing average price rises of 6.8% and the New York Stock Exchange 4.4% year to date.
All this would suggest the UK has seen a lot of good quality businesses listing in 2021 and that the London markets remain in good health. How long this lasts with a new coronavirus variant doing the rounds is another story, but there’s no need to think the IPO market hasn’t performed during the year.