by Sandy Campart, Director of IUP Banque Finance Assurance de Caen
The main objective of an IPO – Initial Public Offering – is to raise capital in order to allow a company to grow. However, during a global economic slowdown, investors are increasingly cautious. In times like these, how should you prepare to go to the market?
Reasons for an IPO
A company’s motivation for going public is often linked to the idea of “creating one’s own currency” in order to fund internal and external growth, to diversify future sources of finance and strengthen the financial structure of the company. Listing a company on the stock exchange results in tradability and liquidity, allowing previous shareholders to exit, realising a gain on their capital. It also creates a valuation for the company which will be useful for future succession plans. At a strategic level, an IPO can enable the company to clarify its strategy, refocus its activities, increase its visibility and credibility, and ultimately differentiate itself from competitors.
Nonetheless an IPO will significantly change the way a company operates. Corporate governance has to be overhauled, support functions professionalised and financial communication must be made transparent. All studies show that, when information is withheld, the negative impact on the share price is greater than if the bad news had been announced.
2019: a mixed bag
In 2019, newly listed companies have seen their share price grow by almost 13% on average. However, the figures vary greatly. Software and IT security companies have performed the best with an average of nearly 40%.
Nevertheless, the stock market performances of SmileDirect (dental aligners), Peloton (exercise bikes and fitness) and even Uber attest to the increased scepticism of investors for unrealistic or exaggerated levels of profitability. Uber’s price has been particularly disappointing since the latest results presented were well below the expectations of the investors. In the second quarter of 2019, the turnover was more than 5% lower than expected and the profit – or rather the deficit – per share was 53% greater than expected. Uber’s growth has been slower than that of rival appLyft, and the restructuring costs associated with many departures, lay-offs and resignations do not seem to be controlled. Additionally, Uber’s CEO, Dara Khosrowski, told his employees that the teams were too large to be compatible with the pace of growth needed, while Uber’s CTO, Thuan Pham, believes it could take decades for Uber to achieve its “vision”, suggesting there could be a later than expected ability to turn a profit.
Towards a better year in 2020?
For a company wishing wanting to maximise its initial flotation price, there are two strategies to pursue: the first is to float when the company is performing exceptionally, the second is to wait until the stock market is in a more favourable position.
In the context of a global economic slowdown, investors have for several months been moving towards “safe haven” shares in order to protect their assets. This, combined with the chaotic path of some recently introduced companies and the abundance of private financing, makes it difficult to see an acceleration of operations in 2020.
Even though the flotation of Airbnb remains topical, Postmates (delivery service) and Endeavor (talent agency) have paused their entry to the stock market. It is possible they are prioritizing interest from venture capitalists and risk capitalists. Palantir (Big Data) and Stripe (internet payments) could also look for private funds instead.
The WeWork failure
WeWork is the most prominent example of our current inability to distinguish a unicorn from a chimera. Investors have to learn – or re-learn – how to resist those appealing equity fairy stories and to see beyond the innovative nature and rapid growth of a concept. Cash flow, debt level and governance remain key decision-making factors. In the WeWork prospectus, the word “technology” appears more than 120 times. The Coué method of repetition is here being used to suggest that traditional valuation models should not apply to this business. There is little doubt, however that WeWork is more of a property developer with an innovative business model than it is a technology company.
Analysis: Central banks say no tapering. Markets aren’t buying it
By Sujata Rao and Dhara Ranasinghe
LONDON (Reuters) – Central bankers worldwide have been unequivocal: There are no plans to cut back on money-printing any time soon, let alone raise interest rates.
Markets don’t seem to be buying it.
U.S. 10-year Treasury yields rose on Wednesday to one-year highs above 1.4%, extending this year’s near 50 basis-point jump that has dragged up sovereign borrowing costs in Europe, Japan and elsewhere.
The reckoning is that the spending step-up by U.S. President Joe Biden’s administration and post-vaccine economic reopening will fuel a global growth-inflation rebound, forcing central banks to “taper” or withdraw stimulus ahead of schedule.
A brighter outlook may indeed justify higher yields. But what has started to spook markets is a sudden move up in so-called real yields, or returns in excess of inflation. That shift can tighten financial conditions, suck cash from stock markets and in general, hamper the recovery.
It’s spooking policymakers, too. From the Federal Reserve’s Jerome Powell to New Zealand’s Adrian Orr, many have weighed in this week to stress policy will remain loose for some time.
But the mantra they have chanted for years seems now to be falling on deaf ears.
Powell, the world’s most powerful central banker, knocked yields just a couple of bps lower even after commenting that the inflation target was more than three years away.
Euro zone yields only briefly heeded European Central Bank chief Christine Lagarde’s warning on Monday that the bank was “closely monitoring” the recent rise in yields.
(GRAPHIC – Who’s uncomfortable with rising bond yields?: https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrdbewve/de2402.png)
(GRAPHIC – Powell reassures bond markets but yields stay high: https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgdmzapq/US2402.png)
The reason, according to ING Bank is that markets are pricing “with an increasing degree of conviction” the end of ultra-easy policies.
“Market confidence in the strength of the U.S. recovery is so strong and widespread that the tapering boat has sailed already,” they said, predicting “tapering” to happen by the end of 2021, earlier than the early 2022 predicted by Fed surveys.
“We expect consensus is converging to our view,” they added.
Money markets show investors expect a Fed rate rise next year; some bet on an even earlier move. Euro-dollar futures suggest a roughly 64% chance of a 25 basis-point rate hike by the end of 2022. A week ago it was seen at 52%.
If travel, dining out and shopping fully resume in coming months, it could unleash trillions of dollars in pent-up savings worldwide. Just in the United States, personal savings totaled $2.38 trillion at a seasonally adjusted annual rate in December, higher than at any time before the pandemic.
(GRAPHIC – U.S. savings: https://fingfx.thomsonreuters.com/gfx/mkt/azgpoeylypd/Pasted%20image%201614185996035.png)
That makes it an inflection point of sorts for the economy, according to April LaRusse, head of fixed income investment specialists at Insight Investment. At times like this, even strong forward guidance can fall flat, she said.
“Markets hear central bankers saying ‘Stop it, markets, you are going too far’, but they are worrying central banks might change their mind as new data emerges,” LaRusse said.
“Markets are saying: ‘Yes, we believe what you are saying, but conditions could change and could necessitate a change of policy’.”
It’s a similar picture elsewhere.
In New Zealand, Orr’s highlighting of potential downside risks to the economy contrasted with the buoyant picture painted by data.
Bond yields shrugged off his comments to hit 11-month highs. More importantly, overnight index swaps (OIS), instruments allowing traders to lock in future interest rates, have started pricing a small possibility of an end-2021 rate hike.
Not long ago it was seen cutting rates below 0%.
BNY Mellon noted across-the-board rises in one-year forward inflation swaps — essentially gauges of future inflation — from Canada to Australia.
“Risks are now more toward further removal of easing prospects,” they added.
There is of course the possibility that the pledges to keep policy ultra-loose in the face of recovering growth only fan inflation expectations further. So, could markets force central banks to act rather than just jawboning?
Here the Fed faces less of a dilemma than its peers.
Japan’s 10-year yields are near the highest since late 2018 at 0.12%, posing credibility issues for a central bank that aims to hold yields around 0%.
The ECB too, already struggling to lift growth and inflation, may have to step up bond purchases under its emergency asset-purchase programme to combat rising yields.
“At the moment it’s a tension between markets and central banks rather than a conflict, though that might come,” said Jacob Nell, head of European economics at Morgan Stanley.
“The attitude of the Fed is that if markets think growth is stronger than we do then that’s fine, it will help growth and inflation expectations. So the Fed won’t fight the market — it just doesn’t believe it.”
(Reporting by Sujata Rao and Dhara Ranasinghe; Editing by Hugh Lawson)
Energy, bank stocks drive FTSE 100 higher
By Shivani Kumaresan and Amal S
(Reuters) – Britain’s main stock index recouped early losses to end Wednesday higher, as gains in commodity-linked and banking stocks on investor optimism about a post-pandemic economic recovery outweighed losses in defensive sectors.
After falling as much as 0.8%, the commodity-heavy FTSE 100 index closed up 0.5%, with oil heavyweights BP and Royal Dutch Shell providing the biggest boost with gains of 5.4% and 3.3%, respectively.
Mining stocks including Rio Tinto plc, Anglo American Plc and BHP added between 0.7% and 1.5%, boosted by higher metal prices.
“One of the main drivers for the FTSE over the next few months is going to be investors’ interest in a possible commodity super-cycle,” said Andrea Cicione, head of strategy at TS Lombard.
“If commodities continued to perform as strongly as they have over the past few months, well that’s going to benefit disproportionately.”
British bank Barclays jumped 3.4%, while other lenders rose as Bank of England Governor Andrew Bailey said Britain will resist “very firmly” any European Union attempts to arm-twist banks into shifting trillions of euros in derivatives clearing from Britain to the bloc after Brexit.
Defensive plays such consumer staples, healthcare and utilities were among the top laggards.
The domestically focused mid-cap FTSE 250 gained 1.2% and marked its best day over a week, on hopes that speedy vaccination will help ease coronavirus restrictions faster.
In company news, Metro Bank fell 9.9% as it posted a much bigger annual loss and said it expects defaults to rise through the year as government support measures set in place due to the COVID-19 crisis are wound down.
Consumer goods maker Reckitt Benckiser shed 1.5% even as it capped 2020 with the strongest sales in its history, while Aviva slipped 0.5% as it agreed to sell its 40% stake in a joint venture in Turkey for 122 million pounds ($173.2 million).
(Reporting by Shivani Kumaresan and Amal S in Bengaluru; editing by Anil D’Silva and Emelia Sithole-Matarise)
European shares end higher on upbeat German data
By Shashank Nayar and Ambar Warrick
(Reuters) – European shares rose on Wednesday as sectors primed to benefit from economic recovery were supported by strong German growth data, although concerns over a possible rise in inflation and lofty equity valuations kept gains in check.
The pan-European STOXX 600 ended 0.5% higher, with Germany’s DAX adding 0.8% as data showed bullish exports and solid construction activity helped Europe’s biggest economy to grow by a stronger-than-expected 0.3% in the fourth quarter.
Travel stocks jumped 1.9% to near one-year highs, leading European sector gains on optimism around major countries lifting coronavirus-induced lockdowns.
Still, global airline industry body IATA flagged further headwinds for airlines in 2021.
“The market has fallen recently due to lofty valuations, but investors are becoming more accepting of the fact that as European economies slowly reopen and earnings improve, the current equity valuations could be justified,” said Chris Beauchamp, chief market analyst at IG Group.
The benchmark STOXX 600 has rebounded nearly 50% from its March 2020 lows, also led by historic stimulus measures, but it has still far underperformed a 75% jump in the U.S. S&P 500.
U.S. Federal Reserve Chair Jerome Powell reiterated on Tuesday that interest rates will remain low despite indications of rising inflation, assuaging some fears of a sudden tapering in monetary stimulus.
“While another stimulus package will certainly be welcomed by market participants, inflation fears are still present, despite those concerns being downplayed by officials,” said Milan Cutkovic, market analyst at Axi.
“As more countries are planning the reopening of their economies, the focus could slowly shift back to value stocks.”
The rotation out growth-driven stocks was apparent, with the technology sector losing nearly 4% this week, lagging all of its regional peers.
In company news, AstraZeneca dipped 0.2% after it told the European Union that it expects to deliver less than half the COVID-19 vaccines it was contracted to supply in the second quarter.
Norwegian salmon farmer Bakkafrost was the biggest percentage loser on the STOXX 600 for a second session after it posted a fourth-quarter loss due to the pandemic.
German sportswear company Puma dropped 2.1% after saying it expects a heavy impact on its results from lockdowns through the end of the second quarter.
Telecom Italia surged 9.2% after it said profit and sales should stabilise this year.
(Reporting by Shashank Nayar in Bengaluru; Editing by Saumyadeb Chakrabarty and Uttaresh.V and Kirsten Donovan)
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