IPOs will continue until people stop buying them

Indeed, it looks as if the great Gulf IPO boom will continue until investors stop buying the shares. At present IPOs are still perceived as a 'you can not possibly loose' kind of investment, particularly in the UAE where new issues are not priced on market criteria and a significant premium is assured.

However, IPOs are a feature of booming capital markets and they dry up very quickly once markets head downwards. There is no attraction to buying a new IPO issue if the value of the shares then falls, and the IPO issuer in these circumstances will probably end up with a lot of unsold shares.

Liquidity canard

One argument advanced by investment bankers is that with just $13.5 billion worth of IPOs in the pipeline in the GCC this is nothing by comparison to the wall of liquidity looking for a home, with an oil surplus of around $150 billion predicted for 2006.

Yet this is a canard. US technology IPOs dried up after the Nasdaq crash despite the multi-trillion dollar US economy continuing to function. This is not the way investment behavior works.

More pertinent should be enquiries from investors into exactly what they are buying in IPOs. Does the company have a track record, or is this just a start-up? Is the management up to the job of investing the IPO proceeds, if indeed the company actually gets any of the money? Why is the company coming to market: are the founders selling out or developing their business?

It is a typical feature of booming stock market environment that such annoying things as profit records tend to get forgotten in the rush to grab as many shares as possible. The focus becomes more how much can we borrow for this issue than is it worth buying.

Nor is a booming regional economy a guarantee of ever rising stock prices. Shuaa Capital points out corporate profits are up 305% in the past few years while regional stock markets are up 450%, which surely indicates that investors have driven share prices ahead of their value in relation to profits. In short, stock markets get carried away.

Chinese precedent

This happened in China five years ago, when a stock market boom went bust, and yet this has not prevented stellar growth in the Chinese economy. The IPO market has only just revived in China.

Is this what we are going to see in the Gulf region: high economic growth, poor stock market performance and no IPOs? Certainly the performance of local stock markets in the UAE and Qatar with stocks down by 29% to 35% looks more indicative of a correction phase than a continuing boom; and Saudi Arabian stocks took a 5% tumble on Sunday February 26th, which could mark a turning point.

Of course, IPOs do not help matters and some investors will sell shares in the market to participate in the 'can't loose' IPOs, and therefore depress falling markets further. But what if markets carry on falling and IPO investors are forced to sell at a loss, after their borrowing costs? Then they are hardly likely to rush to buy another IPO, and the IPO circus will be over.