IPO Wave In Emerging Markets Might Pause For A While

India saw a boom of IPOs led by large new-age technology companies tapping the markets, however, the phenomenon was not limited to India alone.

Emerging markets Initial Public Offerings (IPOs) in 2021 mopped up around $228 billion in total, up 31 per cent from the $174 billion raised in 2020. Despite the Covid-19 pandemic, the liquidity injected into the system allowed emerging markets to perform well, at least during the beginning of the year.

However, the benchmark that tracks the performance of the emerging markets, MSCI Emerging Markets, has not been a great performer over the entire year. A part of the underperformance could stem from the heavy weightage of China in the benchmark.

China alone accounts for around 30 per cent of the weightage of the benchmark. These companies depend on foreign capital, and possibly foreign investors have been cutting their exposure to several of these markets.

The IPO boom was led by China, which despite having a weak market, managed to conduct 602 IPOs. In terms of IPOs launches, China was followed by South Korea, India, Indonesia, and Brazil.

According to experts, the boom was mainly led by launch of technology IPOs. The new IPOs have proved to be winners, with a 30 per cent rise in a size weighted portfolio. On a more granular basis, Middle East and Africa contributed to around 27 per cent of these gains, while Asia contributed to 37 per cent of these gains.

In contrast, emerging markets in Latin American and Europe lost around 14 per cent. The contrasting performance could be a result of asset-heavy energy companies going public in Europe and Africa, while most IPOs from Asia were from the technology, consumer and industrial sector. Latin America continued facing political turmoil as well, lowering returns further.

With growing problems in China from the fallout of the Evergrande crisis, whether the IPO market would remain hot enough remains to be seen. In addition, the Chinese government has imposed several strong regulations on the technology and fin-tech sector. These are the hottest sectors worldwide.

However, valuations have fallen after the government launched a crackdown on these companies. As a result, attracting foreign capital could grow tougher over time.

India saw the largest IPO in the history of its capital markets get executed in 2021. However, the Securities and Exchange Board of India (SEBI) is bringing in more rules to regulate the markets to prevent any transparency issues.

In addition, the bond markets yields indicate a potential rise in interest rates, which could lower equity market valuations. Several international brokerages have asked investors to remain underweight on India until markets cool off.

The domestic brokerages and institutions remain upbeat on India’s prospects. The LIC IPO, along with other large tech IPOs, could be potentially attractive investment opportunities.

Brazil, another major emerging market, faces interest rate concerns as well. According to a report, 2022 could see just a fifth of the total IPOs in 2021 as the market conditions might not be conducive for IPOs going ahead.

With major emerging markets facing headwinds, according to experts, the growth in IPOs might not be as rapid. Some countries like Brazil might even see a decline.