How about Nasdaq-type IPO pulse meter?
A recent study by markets regulator Securities and Exchange Board of India (SEBI) revealed that most investors are just migratory birds when it comes to investing in primary markets. According to SEBI findings, “Individual investors sold 50 per cent of the shares allotted to them by value within a week of listing, and 70 per cent of shares within a year”.
There has been rising concern from market veterans not only on the sheer number of IPOs hitting the markets but also about their valuations, as a lot of punting has been happening in the past few months. Month after month, the number of issues has been increasing. Over half-a-dozen companies have already launched or are planning to tap capital in September on the main board, including Bajaj Housing Finance among the others. If one considers SMEs, around 240 companies have hit the capital market in 2024 — an IPO a day — quite amazing!
How long can we expected the current boom in the IPO market to continue? While the trend may be difficult to predict — the rule of thumb is that if the secondary market is under a bearish grip, the IPOs will go back to the shelf.
To address this issue, and gauge the peaks and troughs in advance, Nasdaq recently (in January) launched an index — Nasdaq IPO Pulse Index.
Key indicators
According to the world’s premier bourse, the Nasdaq IPO Pulse Index is driven by six leading indicators of IPO market activity. They are: Year-over-year changes in the Fed Funds Rate, year-over-year changes in the VIX Index, recent returns (S&P 500 Price Annual Growth), valuations (S&P 500 Enterprise Value to Sales Ratio Annual Growth), investor sentiment and Nasdaq’s proprietary IPO data. “When combined, the Nasdaq IPO Pulse has proven to consistently lead directional shifts in IPO activity going back to the early 1990s, on average leading those turns by about five months,” it said
The IPO Pulse Index was launched to bring improved visibility and transparency into the IPO market through empirical data — both for companies as well as investors.
According to Karen Snow, Global Head of Listings, Nasdaq, “Companies analysing an initial public offering are always looking for key indicators and metrics to help them plan for the most optimal time to list.”. Investors, on the other hand, benefit from insights into upcoming market trends, so that they can adjust their portfolios in anticipation of new IPOs. This can mitigate risks and maximise potential returns.
“We carefully curated the index methodology that blends industry and proprietary Nasdaq data to provide corporates and investors with a pulse of how receptive the markets may be to new issuances in the near term,” said Phil Mackintosh, Chief Economist at Nasdaq.
The Nasdaq research team has back-tested more than 50 data series to confirm the six indicators that gauge market shifts.
Balanced features
According to Nasdaq it has statistically balanced features such as, Depth (the index moves significantly), Diffusion (most of the six components contribute each time) and Duration (the index trends for at least a few months).
The IPO Pulse Index is updated quarterly, allowing enough time for the data to develop real trends while being updated frequently enough to remain a relevant and timely tool for investors and companies, said Nasdaq.
In India, the BSE and NSE have IPO indices, but they are purely based on price movements in the secondary market and free float market capitalisation weighted methodology. As and when new companies start listing, the old ones make way for them.
Given the current frenzy, we should also consider having a similar index back home. However it should consider broader macro indicators such as economic growth, tax collections, sales data, etc, capturing sectors and industry that are going to see better times or bad days.