Buying IPOs in crashing markets is against commonsense!

There is really only one reason why companies are rushing to IPO in the Gulf today, and that is because company directors are in the best position to decide when to sell-out for the best price, and many think that time is now.

Is that a question of immediate greed or fear of the future? It amounts to the same thing! Investment bankers might choose to argue that succession planning by major families is a key factor, and that an IPO is a way to take a business on to the next stage, after all there are serious IPO fees at issue here.

But as a shareholder in a company you do not sell shares or dilute your stake unless you feel that an opportunity if not taken now will pass. So will the buyers of IPO shares today live to regret their purchases later?

Expensive IPOs

Well, it has to be said that paying a high price for any investment - and a price-to-earnings ratio of 25 in an emerging market is a high price - is not generally the way to make a future profit. Better perhaps to wait until the stock market crashes of the past year are played out.

Indeed, why would you buy any share issue in a falling market? It beggars commonsense. Why buy today what you will more than likely be able to buy more cheaply in a few months time?

Maybe Arabian stock markets have hit the bottom, but they may not have. You should at least wait and see! Valuation levels in markets such as Saudi Arabia still have analysts scratching their heads at what is going on, and this should not be an indication to buy an IPO, far from it.

Last chance saloon

Therefore it is even more understandable why some many companies are rushing to IPO right now. They are afraid of missing out on the last burst of investor enthusiasm before market declines become so big and so obvious that everyone understands what has happened.

For at the present a section of the investment community, mainly uninformed retail investors think that IPOs are still a passport to instant riches. They should note that the oversubscription levels have fallen sharply back and so have the profits available for instant sellers as Emmar's Economic City IPO showed this month.

The next stage in the IPO phenomenon, if past history of markets is any guide, is that an issue will fail to meet its sale price when it starts trading on the stock market. Then the game is up and those in the IPO queue will have to wait for another boom.