IPO activity slumps as macro headwinds weigh on stock indices - Stock Market News



The extensive stock market downturn since the beginning of the year has caused a significant ‘drought’ in the initial public offerings (IPOs) market, especially compared to last year’s boom. To make matters worse, companies that have recently gone public have been amongst the biggest underperformers in the major US indices, contributing negatively to the already frozen IPO activity. What are the key drivers behind the massive slowdown and where should investors focus in the upcoming months?

Unfavorable market conditions

In 2021, the corporate world experienced a massive surge in IPO activity as the excess liquidity provided by loose monetary conditions and stimulus checks bolstered investors’ appetite for risky bets within the equity market. The IPO bubble burst quickly though, with the prolonged sell-off in major stock indices denting enterprises’ desire to get listed.

This massive downfall is mainly attributed to the Fed’s aggressive tightening, while geopolitical tensions and persistent inflationary pressures add secondary downside pressures. In this highly uncertain environment, investors have ditched growth stocks in favor of ‘value’ options within defensive sectors. Therefore, why would an innovative company that heavily relies on its growth prospects attempt to go public in a period when market participants are tilting away from high risk-reward opportunities?

From zenith to nadir

The current narrative fits precisely the data observed in the IPO market. So far in the year, IPOs in the US are down 80% against the same period in 2021, meanwhile they have raised just $7.2 billion versus $154 billion raised during the whole course of 2021. What’s more, roughly 250 days have passed since the last tech IPO worth more than $50 million, marking new records even against the 2008 financial crisis and the early 2000 dotcom crash.

Market implications

There are many alternatives to equity issuance for a firm to fund its operations such as private capital, business angels or even borrowing from capital markets. Nevertheless, in an environment of high interest rates and sticky inflation, it can prove very challenging for many ‘young ‘corporations to raise capital through those channels, especially in a period of erupting geopolitical flare-ups and a looming global recession.

Therefore, the biggest fallout from the bust in IPO volume is that many innovative products or projects, which could increase productivity in other sectors and spur a broader economic expansion, are lacking the necessary funding for their production.

The next big event

Even though there are very few companies that proceed with IPOs in the current unfavourable conditions, Volkswagen is planning a blockbuster deal by taking its Porsche brand public. Volkswagen intends to list Porsche on the Frankfurt Stock Exchange, subject to developments in the capital markets as the current high volatility acts as a demotivating factor. The company is likely to use this deal as an effective and cheap way to fund its transition to electric vehicles, which can prove highly beneficial for years to come as the world transitions to more sustainable energy sources.

How will Volkswagen stock react?

Taking a technical look, Volkswagen’s stock is currently hovering around its 50-day simple moving average (SMA), while retaining a neutral medium-term picture.

Therefore, should Porche’s IPO prove to be a success, Volkswagen’s share price could propel towards its recent peak of €208.50.

Nonetheless, in the negative scenario, the €180.00 support could come under examination.

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