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Will Alibaba IPO herald a near term top for global markets?

The News International Team

Chinese e-commerce giant Alibaba’s USD 24 billion IPO plans has made not only US tech biggies, but also analysts sweat under the collar. Many, like Nicholas Colas, chief market strategist at ConvergEX Group, point out the fact that “mega-IPOs do tend to happen toward market tops.”

“Very few IPOs get done during market troughs,” he said in a note to clients on Monday. “Many more make their debuts anywhere from the midpoint of a cycle all the way to the peak.” (Read more here )

A recent example is of Facebook, which lost one-third of its value within two months of its debut. By pricing Alibaba’s widely-anticipated IPO below market expectations, CEO Jack Ma is seeking to avoid a repetition of internet peer Facebook’s disaster debut, say analysts. At USD 66 a piece, Alibaba would be valued at USD 163 billion – below analysts’ expectations for a valuation of more than USD 200 billion.

That is the valuation part, but where will the money come from? As blogger Kid Dynamite explains the “cash on the sidelines” doesn’t change, it just moves from one account to another. Simply put, it means, money doesn’t flow into or out of the stock market, it flows through the market.

“When Alibaba sells USD 20-something billion dollars of stock, they’ll be altering the cash/shares balance in the market ecosystem by increasing supply of shares and decreasing the supply of cash,” it says. So, existing investors of Amazon, Facebook, Google etc may choose to take money out of the US tech majors and put it into the Chinese company if they feel Alibaba offers more value.  

Of course, that doesn’t mean a market crash is guaranteed.

But this phenomenon is not limited to US market. Remember the  Reliance Power IPO in January 2008 just before the market went into a prolonged downtrend?

Capital shifting trends in the run up to the Ali Baba IPO will be crucial to the Indian market as well, as much of the upswing in share prices has been driven a rush of global liquidity more than an earnings recovery.

Posted by Sagar Salvi

Also Read: Is JD.com a better buy than Alibaba?


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