IPOs as Sentiment Indicator

Booms tend to amplify grandiose projects. Such is the reason for the skyscraper cycle or signature skyscrapers often herald market euphoria or market tops.

IPO trends also give us hints on the whereabouts of the stages of the stock market cycle.

LT Group’s [PSE LTG] successful follow on IPO, which raised $792 million or 32.8 billion pesos about a week ago, has been considered to be the “ largest-ever equity fundraising” targeted at local investors, and second largest only overall after BDO’s Unibank $1 billion fully-underwritten rights[1] offering last year.

LT Group had been sold as a vehicle according to Finance Asia to “broaden the exposure to the Philippine consumer sector”[2].

IPOs functions as a great gauge of market sentiment.

If the market is up, then growth of IPO activity follows and vice versa.

Such trend can be seen from 1994 through 2012. The above chart from PSE includes follow on offerings, deposit receipts offering, listing on 1^st, 2nd and the SME board and listing by introduction. Excluded are convertible preferreds and warrants.

Following the boom of 1993, in 1994 there were as many as 21 IPOs. That number declined since and shrivelled as the Asian Crisis emerged. Today we are about halfway 1994.

About 7-10 IPOs has reportedly been in the pipeline[3]. But if true, this will fall short of the 2012 levels.

I think that the rate of gains of the Phisix will increase the number of IPO applications which should be expected to surge as the Phisix mania escalates.

This will likely be pronounced as if the Phisix hits the 10,000 level or anywhere near that level, this year.

The US has been no different. Many of the 25 largest IPOS in the US took place during the the late stages of the boom which preceded the dot.com bust as shown by the scattergram.

A vast majority had been were communications companies.

Since the dot.com bust, US stocks has been in a decade long consolidation phase. Thus, big IPOs had been a rarity.

Nevertheless Visa, the biggest IPO so far raised $17,684 m was listed on March 18, 2008 prior to the Lehman bankruptcy.

Facebook had been the third largest at $16,007 listed on May 17, 2012. General Motors listed on November 17, 2010 raised $15,774 in May 17, 2010, all these are from Renaissance Capital[4].

If US stocks continue with its record breaking streak, then we should also expect IPO activities to follow.

Nonetheless IPOs can also serve as beacon to important inflection points of stock markets.

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[1] IFR Asia EQUITIES: BDO Unibank sets price for US$1bn rights offer June 5, 2012

[2] Finance Asia LT Group raises $792 million from Philippines’ largest public deal April 18, 2013

[3] GMA News Online 7-10 firms to hold IPOs this year — PSE's Sicat March 12, 2013

[4] Renaissance Capital All Time Largest US IPOs - Top 25