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Why You Should Be Investing In IPOs

For a nation of 24 million allegedly adventurous humans, Australians are surprisingly cagey about investing in IPOs. Why?

A lot of it is a recent aversion to mining exploration floats, which historically have been the majority of new issues, thanks to the retracement in the prices of most hard commodities such as iron ore, coal and industrial metals.

The old system whereby small explorers found and proved up mineral resources and then brought in bigger partners to build mines is now in limbo, to put it politely. Demand has mostly evaporated and the tiddlers are holding onto what cash reserves they have until things pick up, which could take years rather than months. Until there are signs of a reliable lift in prices for various metals, only the brave will buy in.

But there are some other aspects, too. The distortions created by the publicity machine mean that problems with a couple of recent big scale, big name industrial stock IPOs that came partially or wholly unstuck (think Myer and Dick Smith) have caused investors to retreat further.

There are a host of reasons why they did, but the central point is that they were exits by private equity organisations that in both cases surfed market conditions well to produce relatively high prices for investors, who were then hit by the consequences of downside risks that manifested themselves after the stocks floated.

The combination of the end of the mining boom and those high profile IPO setbacks has meant that a lot of investors are not thinking to buy into IPOs, even though very few of the ones coming through relate to exploration or are private equity exits.

So it might come as a surprise that IPOs outperformed the market in 2015 returning an average of 23 per cent overall. Of the 93 companies floated last calendar year, 69 per cent finished their first day’s trading above their issue price.

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What’s also surprising is that we’re seeing an anomaly at the moment.

The usual drop-off in new IPO offerings has not occurred even though our market has been through the sort of dip that would usually close what experts call the “window for capital raisings” with an emphatic thud. The uptrend that began in mid-2014 is still there.

Even though the main share market index, the S&P/ASX200, dropped by just over 10 per cent in the first six weeks of this year, the number of new listings for which ASX Ltd is scheduling float dates in the next two months has climbed to 18, versus for instance the 12 listings that came on in December and January.

Why? No one is absolutely sure because market volatility, of the sort seen between January 1 and the bottom on February 12, is usually perceived as an absolute killer of new floats. Experience of human emotion, always a big factor in markets, says that if established companies are sliding backwards in price, what hope is there for a new untried company?

Here are a few reasons IPOs should be re-examined in a more positive light:

1. There are only three miners in the ASX’s list of imminent floats, so essentially there is a spread across all sectors.

2. Issuers are well aware of what is happening and they’re pressing ahead because their business plan doesn’t bear at all on current market sentiment.

Keep in mind that most of the current equity market grief is being caused by a worldwide glut in commodities such as iron ore, steaming coal and oil. For companies not producing those commodities, their low prices either don’t matter, or represent a bonus.

Health care? Financial technology? Dairy? They are all represented on the list of upcoming floats, or in the pipeline, and they relate only tangentially to commodities if at all.

3. A lot of investors are only now becoming painfully aware that a reliance on large capitalisation, high dividend paying stocks such as the big banks and Telstra is last year’s market strategy, and they are seeing that diversifying into other sectors is starting to acquire two significant positive elements.

Those lesser touted sectors may well have more upside in terms of capital growth, and sitting still on established positions in the market is a lot less attractive now than it was.

Conclusion? As often happens, investors are behaving like those generals who, throughout history, were criticised for always being ready to re-fight the last war.

If they look forwards and not backwards, they might find there is a lot more to be positive about than the current market mood suggests.

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View More Articles By Andrew Main

Andrew Main is writing for OnMarket, an Australian fin tech that recently launched the world's first direct access portal into ASX IPOs and placements. Andrew is an award winning journalist and the former Wealth Editor of The Australian with long experience reporting on equity markets and all things financial.

It's free to join OnMarket. Join thousands of investors and receive a $500 sign up bonus to use towards additional shares in OnMarket offers you bid for. Join OnMarket free today.



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