Alibaba IPO Signals Strength in U.S. Stocks
Success of Offering Is Set to Spur Appetite for New Listings
The record initial public offering by Alibaba Group Holding Ltd. BABA +38.07% is set to spur greater appetite for new listings and should support the U.S. stock market's record-setting rally, investors say.
The underlying case for equities remains strong, according to investors. The Federal Reserve isn't rushing to raise interest rates, the economy is expanding moderately and companies are posting higher earnings and continuing to buy back their own shares.
Moreover, many hedge funds and mutual funds are expected to buy stocks more broadly, as their returns are trailing the S&P 500's 8.8% gain this year. They will want to scramble to catch up.
Thanks to Alibaba, the IPO issuance has already topped last year's total and is on its way to the biggest year by deal value in more than a decade, according to data from Dealogic.
In the year to date, IPOs in the U.S. have raised nearly $69 billion. That is up from $62 billion in all of 2013. The record was set in 2000, when IPOs garnered $105 billion.
"There is some buying power out there," said Andrew Slimmon, a portfolio manager at Morgan Stanley Wealth Management who oversees roughly $4 billion. "The market is going to have a good fourth quarter, because we have cleared some hurdles here."
Alibaba's IPO was one of those hurdles. A fumbled debut by the company could have dented investor sentiment. That happened following Facebook Inc. FB +1.18% 's May 2012 IPO, which was marred by technical glitches.
But Alibaba's deal went off without a hitch, with the shares soaring 38% in Friday's debut.
Many fund managers viewed the heavy demand as a positive sign.
"It's a good thing when you have a healthy IPO calendar," said Jerry Braakman, chief investment officer at First American Trust, which manages about $1.1 billion. "Companies and investment bankers think it's going to be a strong market, so it's a bullish indicator."
Mr. Braakman thinks stocks have more room to run, even as they remain pricey compared with long-term averages. He expects the U.S. economy will continue to pick up strength and is betting on gains in technology and bank stocks as a result.
The S&P 500 is trading at 15.6 times projected earnings over the next 12 months, compared with an average of 14 over the past 10 years.
But the huge Alibaba deal also caused many issuers to hold off coming to market in recent weeks rather than risk being lost in the shuffle, bankers and traders said.
With Alibaba out of the way, the number of newly minted stocks looks likely to only accelerate in coming weeks.
There are more than 100 deals in the pipeline, according to Dealogic, though most don't have pricing dates yet.
"Alibaba certainly hogged the spotlight, but we have a bunch of IPOs that have launched and a bunch that are coming," said Brian Reilly, head of equity capital markets at Barclays.
Among the biggest IPOs on the way is Citizens Financial Group Inc., Royal Bank of Scotland Group RBS.LN +2.46% PLC's U.S. regional bank.
The deal is expected to price Tuesday and raise about $3.4 billion, according to Ipreo, a market intelligence firm.
Another deal garnering some buzz is CyberArk Software Ltd., an Israel-based cybersecurity-software company.
It also plans to price its shares Tuesday, and plans to raise $75 million, according to Ipreo.
"The only sector that has been relatively quiet has been tech, but I think this IPO will bring some life back to that," Mr. Reilly said.
To be sure, the market for both old and new stocks is vulnerable to potential headwinds that could arise by the end of the year. If the U.S. grows faster than expected, with job growth exceeding expectations, investors are likely to get nervous about the timing and scale of any Fed rate increases. On the other hand, any developments dimming the outlook for global growth, such as a sharp slowdown in China, could prompt money managers to sell stocks, diminishing the allure of coming IPOs.
The fourth quarter, which begins in October, is historically an active time for IPOs. That should be particularly so after such a strong calendar year and solid price performance for many new issuances.
Paramount Group Inc., a New York-based office real-estate investment trust, is expected to come to market before year-end with a $2.5 billion IPO
REIT IPOs have seen heavy demand thanks to their hefty dividends at a time when interest rates are expected to remain low.
Traders say they see stepped up demand for stocks from fund managers who are once again struggling to catch up to the stock market's rally. IPOs are a favored way to try and juice returns because their first-day pops in price can add to returns not captured by the big market benchmarks.
The average first-day pop in 2014 for U.S.-listed companies has been 13% and U.S.-listed IPOs this year are currently trading up 14% from their issuance price as of market close last Wednesday, according to Dealogic.
Meanwhile, the HFRX Equity Hedge Index, which tracks stock-focused hedge funds, is up just 1.9%, nearly seven percentage points behind the S&P 500.
Mutual-fund managers aren't faring much better. According to Morningstar Inc., 75% of U.S. stock mutual funds are trailing their benchmarks.
James Palmer, head of equity capital markets for the Americas region at UBS AG, said the last couple months of the year are typically a time when fund managers are scrambling to boost performance, "so there typically is a lot of hunger."
"There's going to be no post-Alibaba IPO fatigue," Mr. Palmer said.