IPOs demonstrate underlying health Investor

An insider's guide to the market: Equity markets have continued to trade somewhat nervously as the end of the first quarter approaches.

This time last year the Iraq war had just commenced and we now see that in early March 2003 stock market indices had reached the low point of the long 2000-2003 bear market. In the ensuing 12 months since then share prices have risen very sharply.

Despite the wobbles of recent weeks the S&P500 and the ISEQ Overall indices have each risen by approximately 28 per cent over the past 12 months in local currency terms. The FTSE 100 has risen by a somewhat slower 18 per cent over the same period, but the recent strength in sterling against both the euro and dollar will have boosted this performance when translated into euros or dollars.

When viewed in this perspective the fact that several important equity indices are marginally in negative territory so far this year seems somewhat less worrisome for investors.

Of the major equity markets only the Japanese market is now safely in positive territory with a 6 per cent year-to-date return. Returns from the main European indices are hovering around zero so far this year although the ISEQ Overall index is still up by close to 4 per cent.

However much of the out-performance of the ISEQ is accounted for by the near trebling in the price of Elan so far this year.

With memories of the 2000-2003 bear market still fresh in many investors' minds the key issue is whether recent weakness in share prices is merely a pause in a new bull market, or whether it marks the beginning of another phase of weakness.

A key indication of whether an equity market is in a sustainable bull phase is the strength of the appetite for new issues. From late last year there has been a gradual but perceptible increase in company fundraising and initial public offerings (IPOs). In the final year of the bear market IPOs had virtually completely dried up.

However, growing confidence in the prospects for global economic growth is leading to an upsurge in capital spending by companies, thus leading to increased needs for capital raising on the financial markets.

Also, many company managements that had deferred coming to the stock market during the bear market are now re-evaluating the benefits of listing their companies' shares on the market.

Eircom and Belgacom, Belgium's main telecommunications operator, were quick to take advantage of the more benign market environment and both companies have launched their respective IPOs onto the market this week.

Current nervous market sentiment led to both companies pricing their respective issues at the lower end of the expected ranges. Belgacom priced its shares at €24.50, giving it a market capitalisation of €8.6 billion.

This price was slightly below the median of the indicative range of €23 to €26.50 and lower than the €25.50 expected by most dealers and analysts.

Likewise the Eircom IPO was priced significantly below the mid-point of its indicative range and came to the market at a price of €1.55.

Initial conditional dealings in Eircom's shares occurred at a modest discount to the issue price whereas Belgacom traded up 4.8% when secondary market dealings in its shares commenced. The Belgacom issue was close to three times oversubscribed whereas the Eircom issue was two times oversubscribed. Belgacom is much larger than Eircom and it has the advantage that it has a mobile arm as well as its fixed line telecom business.

This lukewarm market reaction to these large IPOs is unlikely to deter investment bankers from encouraging more companies to list their shares on the stock market.

They will take heart from the fact that there was sufficient underlying demand to absorb these two issues during a phase of market uncertainty. Furthermore, underlying economic conditions are likely to continue to be favourable for the foreseeable future.

It is true that recent economic data concerning the US and Europe have raised some questions about the sustainability of the economic upturn. However, the silver lining in this cloud is that interest rates are likely to stay low for a prolonged period of time.

Those economists that had been forecasting interest rate rises in the US and Europe by the summer have now pushed back the timing of a rate rise to late this year or even into early next year.

Low interest rates and an environment of positive economic growth, even if that economic growth is somewhat below par, is one that should be favourable for equity investors.

Therefore, the odds are that the current phase of market weakness will prove to be an interruption to an ongoing uptrend across most equity markets.