IPOs: the free-money rush

By Marius-Cristian Frunza
Weekly Briefs

Coursera, Deliveroo, Coinbase, RobinHood, UiPath, Transferwise, Stripe... The list of companies aiming to be the hottest IPO of 2021 is long. The previous economic crisis that followed the 2008 credit crunch was not favourable at all for IPOs. The coronavirus pandemic crisis brought an unprecedented increase in the number and value of IPOs. The resultant bubble attracts more startups to get listed in order to pile cash in their vaults and pump-up their valuations. Is this too good to be true?

Money printing machines injecting liquidity in the financial markets trigger a unique and yet counterintuitive appetite of investors for buying stocks. Longing the equity market amid the worse economic crisis since the French Revolution would not make sense in normal conditions. Investors and individual investors in particular, felt that fiat currency might not be the best way to store value. Thus, they are rushing to get their hand on all assets they can get.

Fears of a hyper-inflationary scenario are fuelling the race to invest in stocks, which have a track record of being an efficient hedge against inflation. Inflation aversion is not the only factor driving the appetite for shares. Gold, a traditional harbour of value in inflationary time, saw its prices decreasing significantly since last summer. The feeling that one could miss opportunities by not being in the right stock is the main engine of the current frenzy.

Young startups seized perfectly the momentum. 2021 seems to be very promising for newly listed companies. Quantitative easing is also a guarantee that these IPOs will deliver initial solid returns. The winners are the investment bankers, filling their pockets with fat fees and their portfolio with hot shares.

The losers seem to be venture capitalists, which will enter into frontal and ruthless competition with capital markets.  When the pandemic began, VCs were sitting on massive uncalled funds, and they became one of the few if not the only source of financing for startups. Therefore, VCs became picky and focused only on established companies with proven revenue track. The only idea of venture in VCs’ business models is only in their labelling. With IPOs booming, many young companies will bypass VCs and go directly to listing.  Along with newly listed companies, crowdfunding platforms have bright perspectives.

The rush for free money has just started. The bitter side could come when the puzzle unravels in big disarray. The IPO rush will not be eternal, with or without quantitative easing, and the bill could look more like an obituary.

Evolution of the number of IPOS in the US (Source: Statista)
What founders have to keep in mind is that an IPO is not the end but actually the beginning. >Nithin Kamath, Zerodha CEO

Market overview

VIX, the leading volatility index, broke a new low since the pandemic outbreak. The 1.9 trillion USD support pack voted by Congress brought relief not only to American household but also to investors. The Dow Jones ended the week not far from the starting point, confirming that the market is looking for a support level.  Bitcoin peaked above 60,000 USD but retreated amid technical sales towards 58,000 USD. Oil prices moved into negative territory amid a third wave of infection in Europe and a new lockdown that hinders the demand.

Focus:

Goldman Sachs

For most banks, 2020 was a rough year, but not for Goldman Sachs. The leading American investment banks had an exceptional year amid the coronavirus crisis. While other banks saw their shares’ price plunging and not riding the quantitative easing, Goldman's share reached its all-time high.  This position consolidates its leadership in the banking sector but opens the gate to new potential ventures. Cryptocurrency aficionados should carefully follow Goldman’s move in this area. Investment banks will not wait to make their presence acknowledged in the crypto-space, and it could be for the best as it could be for the worst.

Focus:

Wizz Air

COVID-19 hit airliners in a way that most analysts could not have imagined 12 months ago. Despite all the problems the transportation industry is facing, Wizz Air, a leading low-cost air carrier from eastern Europe, looks to do better than its peers. Wizz’s share hit an all-time high in March, and the Budapest-based airline seems not to give up so easily.  

Wizz Air managed to keep its ground bases functional throughout the pandemic and managed to open new routes and consolidate its market share in segments where traditional airliners were forced to shut down.

Forex:

Swiss Franc

The Swiss Franc gained a safe harbour status since the breakout of the Eurozone crisis in the early 2010s. The pandemic outbreak was supposed to reinforce its positions amongst leading currencies amid an aggressive money printing strategy of the European Central Banks and the FED. March brought a sudden devaluation of the Swiss Franc compared to the Euro. This came due to a deterioration of the pandemic situation and a lack of clear monetary strategy of the Swiss confederation.

Market outlook

The Dow Jones ended the week close to 32,500, retreating slightly compared to last week. While a market contraction is still probable, the inflow of optimism across equity markets makes it less likely to happen in the short term.

As predicted, Bitcoin rebounded above 60,000 USD, but ended just around 59,000 USD.  

Brent Crude retreated towards 64 USD as the hope for an early recovery dissipated amid the third wave of coronavirus infections in Europe.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.