Record Internet IPO in times of market turmoil suggest a new normal for investors
Facebook is the new normal in investing. The Internet social networking company raised USD 16 billion in a record breaking IPO, in a hostile market environment where all risk assets were falling like ninepins. In fact the company raised its price band and increased the number of shares on offer seeing the demand from investors. All this in a month where US and global equity indices from the Nasdaq to the Nikkei have fallen by over 6% on worries of sovereign debt crisis in the Eurozone and on after effects of trading losses of USD 2 billion suffered by JP Morgan. Facebook IPO is actually a success many times over given the market conditions.
Facebook was preceded by the rise of Apple to the top of the equity league in terms of market capitalization. Apple’s market cap touched USD 600 billion in April 2012 before falling back to around USD 500 billion on profit taking at higher levels. The earlier Internet offering of Linkedin has gained over 90% since it’s listing in May 2011. The search engine giant Google is trading at close to its peaks despite the weak market sentiments.
The rise of the tech giants at a time when the world is facing deep economic problems suggests that a “New Normal” has descended on the markets. The “New Normal” term was initially coined by Bill Gross the PIMCO head, who used the phrase to describe a world where economic growth will become sluggish and capital market returns will be low. Gross was right on the dot when he coined the phrase as economic growth is sluggish with Eurozone at zero percent growth, US at around 2.2% to 2.5% growth, China and India at below trend growth rates of 8% and 7% respectively. Market returns over the last four years have been negative for most global equity indices.
The question investors have to ask looking at the rise of the tech giants of the US is that, the “New Normal” is not sluggish economic growth and weak capital market returns but the rise of silicon valley and the fall of wall street. In a sense it suggests that money is to be made in new technologies, innovations and the reach of the borderless world of Internet. Money will not be made from banking, which will come under increased regulations.
Concepts prevalent in the 2000’s decade including growth of emerging economies (BRIC or Brazil, Russia, India and China) and rise in physical rather than intellectual value are losing relevance. BRIC’s are facing problems of dependence on prices of commodities as in Russia and Brazil, overinvestment and inflation as in China and fiscal and current account deficits as in India.
Going forward, there will be two parallel economies one that will see continuous but turbulent growth and the other that will see extremely low growth. The continuous growth world is the world of technology and Internet and all its corresponding support functions right to the sweatshops in India, China and Taiwan. The low growth world is the world where economies are riddled by debt and other issues, which is going to take a long time to come out.
Investors have a clear choice now. Move money out of the low growth, problem riddled world into the high growth world of technology and Internet. High growth comes with risk but this risk is worth it as the other option is downright useless.