Sharemarket float speculators are winning big – for the moment

The majority of recent share market floats are ‘in the money’, a sure sign the market is enjoying a period of strong upward momentum.

Analysis shows many IPO investors are selling out quickly. Picture: NCA NewsWire/Bianca De Marchi

There has been an unexpected surge in new listings on the Australian sharemarket in recent months.

The sharp fall on global financial markets across February and March saw Australia’s initial public offering activity come to an almost complete standstill as the COVID-19 pandemic deterred many companies from undertaking public listings.

Only 11 companies completed IPOs on the Australian Securities Exchange during the first half of the year.

But it has been a vastly different story in the second half despite the worsening spread of COVID-19, which continues to severely affect economies and financial markets globally.

While volatility on markets is ever present, these uncertain conditions are not discouraging some companies from going down the public listing route.

From July 1 to the second week of November, 32 new companies have listed on the ASX, and between now and the end of this year there will be another nine.

That will bring the number of ASX floats undertaken this year to 52, down only slightly on the 63 listings completed last year.

This uptick in IPO activity certainly is not confined to Australia. On a global level, the three months to the end of September were the most active third quarter in the past 20 years by investor proceeds, and the second highest third quarter by deal numbers.

Data from financial services firm EY shows the acceleration in activity across the quarter brought the number of IPOs completed this year to 872, with total investor proceeds rising by 43 per cent over the previous year to $230bn.

In the US, the boom in new market listings in the second half has been driven largely by technology, industrials and healthcare IPOs. These sectors continue to generate strong investor interest.

What is driving the IPO boom?

In the face of record low interest rates, investors worldwide are hunting for higher returns and increasingly are shifting their cash holdings into other asset classes including equities. Earlier this month the Reserve Bank of Australia followed the line of many other central banks by cutting our official cash rate to just 0.1 per cent. Cash returns after inflation are negative.

In turn money is flowing back into the sharemarket, while the IPO boom is being fuelled largely by speculators who are seeking out short-term profits.

ASX trading data confirms that many IPO investors are buying into companies during their initial offer process, then selling out quickly — often on the first day of listing. This is obviously high risk. Although quick gains can be made, so can quick losses.

An analysis of the IPOs undertaken on the Australian sharemarket so far this year shows that while some companies have generated strong first-day gains for investors, others have done the opposite.

In fact, only 30 per cent of local IPOs this year are trading above their opening day closing price. Several companies that recorded strong first-day gains are now in negative territory.

Overall, more than 40 per cent of the companies that have listed on the ASX this year are trading below their initial offer price.

Other new listings, while they are trading above their IPO share issue price, have not matched the strong gains of the broader sharemarket over the time they have been listed.

Some new ASX listings have strongly outperformed the broader market on a percentage basis, and several companies have more than doubled in price.

By contrast, an equal number of IPOs are trading more than 25 per cent below their share issue price.

Tony Kaye is senior personal finance writer at vanguardinvestments.com.au