IPOs soak liquidity before an imminent sell-off
New Delhi: There is a flurry of activity in the IPO market as it soaks up liquidity in a hurry fearing a big sell-off in the stock market before or after the presentation of the Union Budget on February 1.
The Rs 4,600 crore IRFC IPO opened on January 18 and has been oversubscribed. The IPO of Indigo Paints will open on Wednesday to the tune of Rs 1,000 crore.
The rush for IPOs in January in the beginning of 2021 is being linked to the momentum in the market which is a follow through from 2020, which saw an unstoppable bull run in the stock market breaking all records.
Home First Finance Company with an IPO to the tune of Rs 1,500 crore and RailTel with an IPO of Rs 700 crore complete the tentative line up of IPOs in January setting a target to mop up more than Rs 12,000 crore in one month alone.
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This will be followed by Brookfield REIT IPO to the tune of Rs 4,000-5,000 crore. There is a flurry of activity in the month of January as the indices are at record highs but with a nagging fear that a big sell-off can come at any point.
According to a report by IDFC Mutual Fund, in March last year, market cap to GDP hits hit its lowest level since the 2008-09 GFC; but has now rebounded and is now at a level which is the highest in the last decade.
“Markets look expensive on standalone valuation parameters, part of the higher valuation can be explained by the harp drop in yields across the world,” the report said.
It said that historically the US Dollar and Emerging Market Flows are inversely correlated, and continued US dollar weakness should be positive for Emerging Markets including India.
The report said that benign monetary policies will be followed by central bankers across the world to counter the threat of prolonged recession. The Federal Reserve announced that it will keep interest rates near zero for years until the US economy heals from the effects of the Covid-19 pandemic and the labour market recovers, even if the US inflation rises above 2 per cent for an unspecified period of time. Even in India, the trajectory of monetary policy should mirror the global trend and low cost of capital generally supports higher equity valuations, IDFC Mutual Fund said.
Valuations have been supported by easy liquidity and hope of vaccine-driven recovery, the report said. Markets have been buoyed on higher hopes of earnings recovery especially in value/small cap segment on account of lower interest rates and better than expected demand environment, IDFC Mutual Fund said.
For valuations to sustain, promise of earnings delivery has to translate into delivery of the promise; which has been elusive in the last decade, it said.
