We all know the recent past few weeks have been very rough on the general markets. For instance, the Dow Jones Index lost more than a thousand points since it peaked in the third week of September, and in Europe things seem to be even worse. The most important indices such as the German Dax index and the French CAC 40 have lost respectively 12.5% and 14.7%. You might think this is mainly due to the renewed problems in the Eurozone where several countries have indicated they will be unable to meet the strict budget deficit rules as requested by the European Commission, but nothing is further from the truth.
For instance, the FTSE 100 in London also dropped by roughly 10% and as there is a very clear snowball effect running over to the copper price and definitely the price of oil, we could easily state this was a worldwide correction of the general markets which were mainly fueled by hubris from investors. If we for instance look at a commodity-related index such as the TSX you immediately see a loss of 10%, and it gets worse when comparing the TSX-index to the TSX Venture Index which predominantly contains commodity-focused companies. Since the last trading day in August, the TSX-V has lost a stunning 25% in just seven weeks time. That’s not just a correction, it’s a brutal correction.
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Source: Stockcharts
In light of these ‘performances’, several companies have recently pulled their IPO-plans. In the United Kingdom, two banking groups have postponed an Initial Public Offering, citing difficult market conditions. What’s interesting is that both banks were advised by completely different investment banks. Whereas Aldermore bank’s IPO plans were underwritten by Crédit Suisse, Deutsche Bank, Nomura and Numis, Virgin Money’s offering was expected to be headed by Merrill Lynch and Goldman Sachs. As you see, five of the six names are very big names and it’s not just one firm which backed out because it expects the offering to be a ‘tough sell’, it seems to be a mutual decision of all firms involved.
A cancelled IPO doesn't happen that often, and it doesn’t remain limited to British banks. Last month, Belgian oil shipping company Euronav announced plans for an additional listing on the New York Stock Exchange as that would increase its visibility and coverage in the future. The company didn’t really need to raise additional cash, and the move was predominantly considered to gain a wider investor base. And even though major financial powerhouses like Deutsche Bank (again), Citigroup, JP Morgan and Morgan Stanley were underwriting this IPO, it was cancelled anyway even though this would have been a very small offering (probably less than $150M) which in normal days would have sold out within hours by the four book runners.
These are just three companies, but we see the same sentiment in the USA as well, as NeuroSigma has pulled its IPO plans and several other companies had to offer their shares at the lower range of the guidance (Old Mutual Asset Management, Zayo). On top of that, some companies which did have a successful offering immediately tumbled after trading started (MOL Global is now trading 40% lower in just two weeks and Vivint Solar has seen a similar share price crash).
As it’s not just two or three underwriters which are getting cold feet as it seems to be a worldwide problem whereby even the largest investment banks of the world are getting too scared to underwrite public offerings anymore.This is definitely an important indication that there seems to be a general consensus amongst large financial institutions that the market circumstances will remain ‘wobbly’ at best.
This fear was very likely induced by the fact that Zalando’s IPO, a large e-commerce company in Europe, was a big flop as the share price immediately went south. Want another example? Bill Ackman listed its Pershing Square Holdings fund last week at an IPO-price of $25/share. On the very first trading day the share price started its free fall and closed the day down 12%. In just four days, Ackmans listed vehicle lost 16% of its IPO price.
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Zalando Share Price Source: Deutsche Boerse
Does this mean we are heading to another crash? No. It’s a sign that investors are no longer in some kind of La La Land and are no longer sure of a Free Lunch at every IPO. This sentiment will very likely to continue in the near future and we don’t expect the volatility to go down anytime soon (the VIX reached its highest point in three years last week). We aren’t expecting a market crash, but we can’t sufficiently emphasize that you need to actively manage your portfolio and above all, protect your wealth.
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