A market flush with liquidity

Total amount of money chasing IPO shares for 2021 likely to reach record breaking numbers

IT IS well known that there is ample liquidity in equity markets around the world, including Malaysia.

To get some perspective of the amount of money coming into the market, a look at four ACE Market listings that sold their shares in the first three months of this year, tells an interesting story.

These four listings attracted a whopping RM1.47bil of money chasing after only RM94mil worth of public portion shares of those four companies on sale.

In comparison, for the whole of 2019, for which there were four listings on the main board and 11 on the ACE market, a total of RM1.85bil in applications were made by investors.

Last year, there were two Main Board and 10 ACE Market listings, which attracted RM1.9bil in applications for those public shares.

Hence going by the trend of the first quarter of 2021, the total amount of money chasing IPO shares for the whole year, is very likely to reach record breaking numbers.

One of the four listings this year is ACE Market bound Flexidynamic Holdings Bhd.

It’s public portion of shares was oversubscribed by a mind-boggling 155.72 times.

Another company that had a high oversubscription rate - of 92.17 times - is Mobilia Holdings Bhd, that got recently listed on the ACE Market.

Late Friday, one more company heading for a listing revealed similar strong interest. Volcano Bhd, a manufacturer of nameplates and plastic injection moulded parts headed for the ACE Market, saw its public portion oversubscribed by a massive 176.6 times. It is raising RM8.75mil from the IPO exercise but attracted RM512.82mil worth of IPO share applications.

So what gives? Are these companies really that attractive that so many investors are chasing to get a piece of those shares? Or are the advisors doing a really good job marketing these companies to investors?

Without taking anything away from the above two factors, the answer of the strong interest is just the presence of increased liquidity in the market which in turn seems to be driven by a few factors.

An investment banker puts it down to two factors. “The continued bullish market coupled with the low interest rate regime. Fixed Deposit rates for these individuals are just too low. Hence the strong interest in new flotations on the stock market.”

As at Jan 2021, there was a whopping RM2 trillion sitting in bank deposits, according to Bank Negara data. Not all of that money will make its way into the market but with interest rates low and investing options squeezed by the pandemic, some of that money is making its way into IPO shares and even listed equities.

Alliance Bank chief economist Manokaran Mottain (pic below) concurs. He says that in view of the low interest rate environment, the local bourse is benefiting from the shift of funds into the stock market as investors anticipate higher returns from the asset class.

Mottain though raises some caution.

“Despite the low interest rate, monies sitting in the bank deposits are more secure. This is because if investors put their money in the wrong investments, the principal amount of investment may be depleted, ” he cautions.

However, fund manager Danny Wong believes that investors feel it is the right time to take some risk and move some of their money to assets that generate better returns.

Most IPOs coming into the market seem to be reasonably priced and the low interest rate environment are encouraging investors to shift their funds into the local bourse, he says.

“Equities in long term can provide investors double-digit returns. That’s why investors are willing to take the risk to shift their funds in the stock market, ” says Wong, who is also the chief executive officer of Areca Capital.

Another reason could be that some investors are growing weary of the lower rate of returns coming from certain government-linked investment funds.

“Some of these funds have also been hit with mismanagement allegations, which could be driving some holders to shift out (of the funds) and put the money directly into the (equity) market, ” points out one fund manager.

Meanwhile, Areca’s Wong (pic below) points out that the anticipation of rising interest rates also bodes well for equity markets.

“Should the interest rates move up, bond prices would decline which would encourage investors to sell bonds and buy into equities. This is another reason why liquidity in the equities market would also stem from fixed income besides bank deposits, ” Wong notes.

And here’s yet another reason for money flowing into equities -- government stimulus packages.

It has been widely reported that in the US, as Americans receive their stimulus cheques in the coming weeks, a significant portion of that money will flow into the stock market. To some extent, there is a similar trend here, points out Scott Lim, the managing director of Omni Capital Partners Sdn Bhd.

He says that it is well known that globally, a horde of new retail investors have been jumping into the stock market.

He says that the stock market now is speculatively driven due to massive amount of liquidity and ‘emotional investing’, adding that it is mostly small caps prices that are moving up compared to blue-chip stocks.

He advises investors to look at fundamentals rather than investing based on speculation.

“Many of these stocks are now trading at ‘crazy’ valuations. Investors who continue to chase such stocks have to be careful. When the sentiment turns, it is going to be very ugly, ” he warns.

Meanwhile, the trend of massive amounts of money chasing IPO shares are likely to continue. There is a healthy IPO pipeline in Malaysia. The Securities Commission expects a healthy pipeline of around 30 IPOs compared with 19 a year ago. Not bad, considering the business disruptions caused by the Covid-19 pandemic. These IPOs would raise funds for companies’ expansion and improve their corporate standing.

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