Numbers go the wrong way for new floats

Most floats in recent times have flopped, with only the bravest even considering listing on the market.

Just one company has listed on the ASX since 30 June, with five others showing on the ASX’s listings board as near-term upcoming floats. Picture: AAP

You might have guessed the number of new companies listing on the ASX has plunged. Worse still, almost half of the companies that have floated this calendar year are trading below their issue price.

Just 12 companies completed initial public offerings (IPOs) on the ASX in the first half of 2020, a 66 per cent drop from the 35 listings undertaken in the second half of 2019.

The sharp fall reflects the impact of the COVID-19 pandemic on the appetite of companies to go to market at this time.

A shrinkage in IPOs is not purely an Australian phenomenon. Data just out from consultancy EY for the first six months of 2020 shows sharemarket listings dropped 50 per cent across Europe, the Middle East, India and Africa, and by 30 per cent in the Americas.

While the Asia Pacific was up a slight 2 per cent overall, this was due to China bucking the overall downward trend. Other countries in the region have recorded big declines in IPO activity.

Though we have some groups clearly lining up to float such as peer-to-peer finance group Ratesetter and payments company, just one company has listed on the ASX since 30 June, with five others showing on the ASX’s listings board as near-term upcoming floats.

While COVID-19 is very much to blame, there’s also a rising undercurrent of reluctance by small investors to participate in IPOs.

That’s largely a fear factor, because longer-term data analysis shows a high percentage of companies that list ultimately end up trading below their issue price.

Of the companies that listed on the ASX in the second half of last year, 60 per cent are currently trading well below their issue price.

Over the whole of 2019, when 63 companies listed on the ASX, 56 per cent of those are now in negative territory to varying degrees.

Going back to 2018, of 100 new listings on the ASX, 69 of those are trading at or below their issue price.

Of course, there are many examples of IPOs that have done extremely well, including some of the ones so far in 2020.

The individual successes of companies is generally linked to their own business operations, but external factors such as COVID can often come into play.

For example, several of the best IPO performers on the ASX in the first half of this year are companies that operate in the healthcare and biotechnology sectors.

Both areas have been propelled because of the COVID outbreak, with consumable product makers and suppliers achieving record sales. Medical research is another hot area continuing to garner strong investor demand.

What’s also clear as a general investment trend, however, is that an ever-growing proportion of retail investors are shifting their equity strategies away from specific companies to reduce their exposure risk.

The latest ASX report covering Australia’s exchange traded funds market to 30 June shows there were $1.66bn of net inflows into ETFs in June, mirroring the inflows in May.

The bulk of inflows are continuing to go into broad market index (BMI) funds tracking the top end of Australian market, which house about $14.6bn of listed managed fund assets.

The so-called IPO pop refers to companies that close well above their share issue price on the first day, delivering big returns for their investors — especially those who decide to cash in their profits.

But those initial price gains can quickly disappear. Of the 12 IPOS on the ASX this year, only three companies are still trading above both their issue price and their first-day closing price.

The others are either in the red or are trading well below their day one peak. It’s a statistic that’s definitely worth keeping in mind.

For retail investors, the most important thing to recognise is that buying into an IPO does not automatically translate into a profit, let alone long-term price gains.

In fact, more newly listed stocks end up going backwards than forwards. If you are considering investing in an IPO, read the prospectus carefully before applying for shares.

Understand the business as much as possible, including what it does, its management expertise, as well as its financials, and tread very carefully.

An alternative strategy is to avoid the speculative investment route altogether and to consider a more diversified approach with products giving exposure to hundreds of companies in a single trade.

Tony Kaye is senior personal finance writer with Vanguard Investments Australia

vanguard.com.au