Rush to list stocks stirs memories of tech bubble

Mon May 5, 2014 3:35am EDT

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(Repeats, without changes, story first published on Friday)

* Big inflows fail to rouse equity markets; IPOs absorb cash

* IPO activity nears levels seen in tech bubble in 2000

* Recent U.S. IPO firms largely unprofitable -Redburn

* Short sellers targeting recent IPOs -Markit

By Tricia Wright

LONDON, May 2 (Reuters) - Firms are queuing up to list on equity indexes, sucking cash from existing listed stocks and fuelling worries that these high flotation volumes could be signalling an impending market fall.

So far this year, the value of initial public offerings (IPOs) worldwide has soared close to levels last seen in the dying days of the tech bubble of 2000, supported by central bank policies that have pumped out cheap money and underpinned market gains over the past five years.

While high levels of IPOs can be healthy, feeding firms capital to expand their businesses, valuation ratios on a number of stocks entering the market have risen to levels that can signal the market is due for a sharp correction.

Investors have been dumping shares in recently-floated firms especially in the tech sector as concerns mount about valuations, reviving memories of the dotcom crash.

These IPOs are also soaking up cash. Despite huge inflows into equities since the start of the year, the MSCI All-Country World index, which tracks shares in 45 countries, is trading only slightly higher over the period.

"The new paper which is coming to market is diluting the technical support from fund flows... It does leave us vulnerable," Ian Richards, global head of equities at Exane BNP Paribas, said.

"We know that there's still a big IPO pipeline ... Some of those deals will try to be squeezed through, then potentially that's a suppressant for markets."

Global-listed IPO volume, at $65.8 billion via 331 deals so far in 2014, represent the highest year-to-date value since 2010 and are just shy of a 2000 peak, data from Dealogic shows.

Meanwhile, equity funds globally have taken in more than $84 billion this year, according to EPFR Global data.

"Many times, what fund managers will do is that they will make sales in the secondary market to subscribe to those (initial public) offerings," Ashish Misra, head of investment policy at Lloyds Bank Private Banking, said.

PORK IPO PULLED

While the IPO stream remains robust, many of the companies listing have poor quality earnings. The proportion of U.S. companies coming to the market that are unprofitable is now at 74 percent, its highest since 1999, analysts at Redburn said.

Concerns about overstretched valuations have meant scant demand for new firms that might once have drawn huge interest. Chinese pork producer WH Group, for example, pulled its Hong Kong IPO after failing to get the valuation it wanted while some recently floated web-based firms are trading below their issue prices.

These include King Digital Entertainment, parent company of mobile game "Candy Crush Saga", white goods retailer AO World, and online takeaway service Just Eat - which achieved a heady valuation of 1.5 billion pounds ($2.5 billion), over 100 times its earnings of 14.1 million pounds.

"It's become very dangerous," George Godber, manager of the CF Miton UK Value Opportunities Fund, said.

"Once you start creating losses in the system, then you force people to sell down other positions... (And) nobody in the teeth of a bear market will pay record multiples for something that 'sounds like a good idea'."

Markit data shows that short sellers - who sell borrowed shares, hoping to buy them back more cheaply and pocket the difference - have been targeting stocks which floated in 2013.

In the three months after listing, the nine most borrowed stocks fell by more than 30 percent, it said.

"As IPOs do well, you then get into a frenzy," Miton's Godber said. "The banks are there to make money from transactions, not from the success of them ... and the quality (of companies floating) hugely deteriorates."

($1 = 0.5922 British Pounds) (Graphic by Vincent Flasseur; Editing by Blaise Robinson/Ruth Pitchford)

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