The Dow Jones index recently hit an all-time high amid hopes that the economy was growing at a rate which would not prompt a rise in interest rates. The market has fallen back a little after better than expected employment figures suggested a possible short-term interest rate rise. However, there seems to be a growing confidence amongst investors and analysts.
Might we see a raft of fundraisings?
There are two trends which tend to indicate that a particular index is possibly overextended in the short term. These relate to highly rated IPOs and equity issues to raise new funds. So, should we expect any of these trends to emerge in the short to medium term?
Taking advantage
It is interesting to note the relatively high rating on some technology shares as well as relatively low US base rates. The issue of paper, i.e. equity, without a legal obligation to pay dividends is on the whole cheaper than raising finance with banks. However, we are currently living in a very unique situation where ratings are relatively high at the moment but interest rates are extremely low.
Short to medium term prospects
The problem with raising funds via an equity issue is simple, if the US economy was to improve dramatically in the short to medium term this would prompt talk of further interest rate rises. The interest rate rises would be used as a means of avoiding an overheating economy and bring back the ratings of some of the relatively high technology shares for example. So, if some of the more highly rated companies do look to take advantage of the current situation, investors may not be so forthcoming.
Bank debt
When you bear in mind the current interest rates in the US, UK and Europe for example it is difficult to argue against both refinancing and the raising of new funds. Many of the larger companies in the US already have extremely competitive funding pipelines in place which are taking advantage of relatively low interest rates. The situation with technology shares, as perhaps the most highly rated, is a little more difficult. Many of these highly rated companies are valued on a “best case scenario for tomorrow” which has been prompted by investors/analysts whereby banks lend on actual profitability and cash flow today.
Does the stock market rise seem fragile?
It is rather ironic that the current Dow Jones industrial average index level would appear to be based on the prospects for low interest rates going forward. Even the slightest inkling that the economy was “performing better-than-expected” prompted a fall in share prices. Investors/analysts obviously appreciate that a rise in interest rates would be used as a relatively blunt tool to avoid an overheating economy. However, investors/analysts do seem to be very fickle at the moment with their opinion and outlook changing almost daily.
Conclusion
It does seem inevitable that at some point numerous companies will look to raise funds from investors. This is the way the stock market works, indexes are pushed to levels which are unsustainable and then slowly the bubble is deflated by events such as fundraisings. There is also the issue of how funds would be spent. If technology companies are raising funds on relatively high ratings should we expect their competitors/potential targets to be on relatively high ratings as well?