An influx of large-scale US IPOs is set to reshape market dynamics, creating new competition for capital, index presence, and profit pools. Fast-tracked index additions could drive rotation out of the largest index names. At the same time new AI-focused companies target digital profit pools. We see this as a signal to diversify beyond the biggest index weights and consider physical assets less exposed to AI disruption. Tune in at the start of the trading week for this regular market outlook from Ulrike Hoffmann-Burchardi, Chief Investment Officer Americas and Global Head of Equities.
Transcript
Hello and welcome to Signal of a Noise.
I'm Ulika Femberjadi, CIO for the Americas and Global Head of Equities for UBS 12 Management.
The influx of large-scale USIPOs is creating new competition for existing public companies.
These new companies are competing on three fronts.
They compete for capital, they compete for presence in the equity indices,
and most importantly, they compete for profit pools.
Let's go through each one by one.
First, how will public investors make room for these mega IPOs in their portfolios?
It's likely that investors will fund the purchase of mega IPOs by selling other liquid large cap names, including the MAX7.
The MAX7 make up nearly a third of the S&P 500.
The trading value of these companies is over $100 billion daily.
So to fund a 100 billion of IPO volume, would require a full day of selling of MAX7 stocks.
If this selling occurs over months, it would not have significant market impact.
But it will still likely give rise to some performance drag leading up to the mega IPOs.
Second, how will equity indices make room for these large new entrants?
Typically, newly public companies aren't added right away.
Indexes often require minimum trading history and other proven liquidity and financial criteria.
IPOs are then often added during scheduled rebalances that can occur quarterly, semi-annually, or annually.
But when IPOs are so large that they compete with the biggest index weights,
it becomes a more existential question for the index providers.
Will ignoring these new IPOs create new competition between them and the indices?
Likely for this reason, NASDAQ has already announced a fast-tracked inclusion.
This means that the NASDAQ 100 will add mega IPOs 15 days after the IPO, instead of the typical three-month period.
Futsi, Crisp, and MSCI indices similarly include mega IPOs in the 5-10 days following the IPO.
The key question is, if S&P is following suit?
The S&P has the largest passive tracking of approximately 8 trillion US dollars,
much larger than the $660 billion of the NASDAQ.
S&P typically requires 12 months of public trading in 4 consecutive quarters of profitability.
It would be a watershed moment for S&P to change its roles, which have been in place for over 20 years.
In respect of S&P's decision, the index rebalances from NASDAQ MSCI Futsi and Crisp
will mean additional selling of index constituents to make room for the newly minted public companies.
Press reports have also suggested that as much as 30% of the mega IPOs could go to retail investors.
That is much higher than the typical 5-10% and could squeeze out institutional investors.
We could see a scenario where institutional investors are forced to buy the new public companies in the aftermarket,
pushing up prices and requiring even more selling of existing index names.
The bottom line, retail, active and passive institutional investors will likely fund the mega IPOs by selling stocks with the largest index weights.
Third and last, how will these IPO companies turn a profit, especially those in the AI space?
The answer? In the short term likely from digital profit polls, the 700 billion of digital advertising revenue and the 300 billion of software revenue.
With more and more users spending time on chatbots, it's only a matter of time before advertising and software integrations follow.
These three factors all point to the same conclusion.
It is time to diversify away from the largest index weights and to pivot from soft assets to physical assets that are less likely to be subject to intense competition from AI.
With this, stay well and stay ahead.
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