Hong Kong IPOs hit a new low. How should newcomers deal with it?

The recent wave of Hong Kong stock IPOs broke out over a month, putting out the flames that had been painstakingly ignited in the fourth quarter of last year.

Since the second quarter, 8 new shares have been listed and 7 have broken, with an average decline of 17%. This kind of performance, if continued, would set a record for the worst performance in a single quarter. However, this wave of deep breakouts also unquestionably means that the sentiment of Hong Kong stock IPOs has reached a new low. On the surface, all previous predictions that IPOs will gradually reverse seem to have been punched in the face. This also includes hunters.

What is the reason for the new low in the IPO market? How long will the IPO bear market last? How should newcomers deal with this kind of market?

The core reason for the new low in the Hong Kong New Zealand market is still the liquidity issue. The general environment of the Hong Kong stock market is not good, and the IPO market is also falling. Most people have lost money, and their risk appetite will also decrease.

In a high-interest environment, the risk-free return rate is 5%. On the one hand, there is a market where money is likely to be lost, and on the other, there is a monetary fund with no risk or return that can be accepted. How do you choose one? I believe that many people, whether institutions or retail investors, focus on stability, remove leverage, and reduce unleveraged positions to buy the base. As a result, market capital continues to flow out, and most IPOs are being ignored; it is no wonder that they are performing well.

If there is not enough liquidity in the market, the valuation must be reduced. If the IPO valuation has a large discount, from a market-based perspective, investors will still buy the bill. This discount may start at 30%.

The problem is that companies that carried out pre-listing financing during the previous IPO bull market were all ridiculously high, and most investors were unwilling to accept reversals. As a result, the valuation of many IPOs is still high. As a result, the valuations of many IPOs remain high. Not to mention discounts, it would be nice if there were no premiums.

Insufficient liquidity+insufficient sincerity in IPO valuations are the two main reasons for the current bear market in IPOs. However, when the bear market will end also depends on when these two problems can be solved.

The answer was given in time. In terms of liquidity, we need to look at the Federal Reserve. The US interest rate hike cycle is almost over, but it is expected that interest rates will probably not be cut until the end of this year, so it is unlikely that liquidity will fundamentally improve until then.

However, the end of the rate hike means that the worst is over. Market liquidity will not be worse in the future, and there will always be some marginal improvements.

However, in terms of valuation, on the one hand, it depends on time to absorb the batch of new stocks that were previously raised at a high level. On the other hand, most of the new stocks required market-based issuance, and no successors could be found, and valuations could only be lowered. On the other hand, this wave of new lows in the IPO market will also boost this process, because from then on, even market value management cannot maintain normal issuance, and lower valuation issuance is the only way out. Judging from this point of view, this new low is also a clear market. From now on, most companies will not be able to take advantage of luck, and market issuance valuations will improve substantially.

The bear market for IPOs will take time from a slight improvement to a complete reversal. This time, on the one hand, depends on improvements in market liquidity and valuation; on the other hand, we can also look for some references from historical data.

I have counted the IPO performance data for the past five years. Judging from the dimensions of average increase and breakout rate, the last round of the downward trend of the IPO bear market was from the first quarter of 2018 to the first quarter of 2020. In these two years, the average increase in IPOs continued to decline, while the breakout rate continued to rise.

The best time for the IPO market is from the second quarter of 2020 to the second quarter of 2021. This year is also the happiest time for newcomers.

Starting in the 3rd quarter of 2021, the IPO market turned bearish, and it is also two years until today. Since the last round of the bull market was really strong, and the profit effect was so good, the strength of this round of bear market was beyond imagination. But in any case, the duration is not short, the adjustments are big enough, and the newcomer's mood is pessimistic enough. Most companies have also lost room for options other than drastically reducing valuations. These are all characteristics of the end of a bear market. In the darkest hours, the dawn always comes out.

Finally, in the face of the current IPO market at the end of the bear market, what should new players do? Personally, I think most people should just keep watching; let's not stop here for a while. Because in a bear market, the risk-benefit ratio of participation is really not high. Everything has a cycle. The alternation of bulls and bears is the rule of the market. Even though the bull market is late, it will always arrive, and it won't be too late to wait until the bull market is established before entering.

However, for high-ranking newcomers, they still need to stay present. It's just that positions must be light and use a small portion of capital to test the waters and experience the market. This is also a necessary way to improve experience and awareness, and when the market turns bullish, it can also seize opportunities and greatly increase yield.

OK, these are my personal thoughts on the recent trend and future development of the IPO market. People with different opinions are welcome to discuss. I think it's pretty good, and welcome to pay attention.