Sorry Wall Street – Asia is the New King of the Global IPO Market

[Editor's Note: Although General Motors Corp. yesterday grabbed the headlines with news of its hefty $10.6 billion intial-public-stock offering (IPO), Money Morning's Keith Fitz-Gerald once again reminds investors that the real action is taking place in Asia - and especially China. For more information on the GM IPO, please click here. And read on to see how Fitz-Gerald tells investors to profit from this powerful trend.]

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The United States – and Wall Street – is surrendering its mantle as the global center for intial public stock offerings (IPOs).

In fact, unprecedented demand for IPOs in Asia has reduced the U.S. share of the global IPO market to an all-time low.

With another $10 billion in IPO deals expected to be completed by the end of this year, the total amount raised worldwide for all of 2010 will approach $145 billion.

With $76 billion raised – including $22.1 billion from Agricultural Bank of China Ltd., alone – China topped the field by raising the most money of any single country.

No U.S. company raised more than $700 million.

This says a lot about the respective outlooks for the two countries' economies. And it also tells us a great deal about how we should be investing our money.

Let me explain.


Creating the Chasm

This disparity in dealmaking is certainly a dramatic one, but the chasm wasn't created overnight. Indeed, the latest data from Bloomberg News shows us that the Asian region's share of global initial public offerings has increased 600% from 1999, when it represented a mere 12% of the world's IPO market.

U.S. IPOs have dropped 75% to an all time record low of 11% during that same period, according to Bloomberg.

This despite the fact that investors in Asia are willing to pay an average of 24 times earnings or roughly twice what they would pay for comparable U.S. equities.

I can't say I'm surprised and you shouldn't be either. Asian companies are expected to grow five times as fast – or more – than their newly minted U.S. counterparts. Bloomberg reports that Hong Kong's AIA Group Ltd. and Coal India Ltd. raised almost the same amount this month as all U.S. deals have this year.

That's why this disproportionate relationship is only going to become more lopsided as time goes on.

According to various reports, Jiangsu Rongsheng Heavy Industry Group Co., Petronas Chemicals Group Bhd. and QR National Ltd. are just three of the many companies reportedly preparing to sell more than $10 billion worth of shares beginning this month. This is on top of the $134 billion already raised in 2010.

Six other China companies have already raised at least $1 billion each this year while Chinese IPOs have attracted some $76 billion all by themselves, paced by the Agricultural Bank of China's $22.1 billion IPO, the largest stock-offering on record.

This shift in capital to Asian markets is about growth in its rawest form. It's simply "what the market needs and wants," according to Jeff Urbina of William Blair, a Chicago-based firm managing more than $41 billion.

A look at the data will tell you very quickly why investors "need and want" to invest in Asia. Just consider that:

  • Six of the Top 10 IPOs this year are companies from India and China.
  • IPOs from India could exceed $8.5 billion this year, exceeding the $8.2 billion record set in 2007.
  • Asian companies completing IPOs in 2010 have increased revenue by 31% this year, a top-line growth rate that's four times faster than the average for India-based firms and a full nine times faster than the growth rates of U.S. companies.
  • IMF data shows the U.S. economy declining to a mere 2.3% growth rate this year, while China remains on track to post growth of nearly 10%. As a whole, Asian economies, including China, are expected to advance at a 6.6% pace.
  • The U.S. Standard & Poor's 500 Index has risen a mere 7% so far this year. At the same time, Asian IPOs have risen an average of 36%. Some, like China's JinkoSolar Holding Co. (NYSE: JKS), which gained 155%, have actually climbed a lot more.

And it's not just Asian companies listing on Asian exchanges. U.S., European and South American companies are headed that way, too. I have heard unconfirmed reports that blue-chip companies are evaluating listings on China's Shanghai and Shenzhen stock exchanges.

Other companies, such as the London Stock Exchange Group PLC (PINK: LDNXF), Seaspan Corp. (NYSE: SSW), HSBC Holdings PLC (NYSE ADR: HBC), and even NYSE Euronext (NYSE: NYX) have already publicly stated they intend to list there.

Key Questions

Given the interest and activity, two key questions must be answered:

  • First, is there a hidden wildcard here that might mean that something other than Asia's promise is driving the intense interest that's creating this dramatic disparity between the U.S. and Asian IPO markets?
  • And, second, is the Asian IPO market yet another financial bubble in the making?

My take is that we're seeing our own zero-interest-rate policies here drive capital there and the reason is really quite logical. Because the United States and Japan are both now maintaining what are essentially "zero-interest-rate" policies, the investors who have traditionally viewed these two markets as safe havens or refuges from risk are now sending their capital into other markets around the world. These investors are willing to brave the higher presumed risks of other markets in return for a better return on their money.

That does a lot to explain why that money is flowing into Asian IPO deals at such a dramatic rate.

By keeping interest rates down so long, our government is actually driving capital out of our markets and into the hands of our global competitors – effectively blunting the economic recovery.

But is that all that "easy money" creating a "bubble" in Asia?

Zero interest rates aside, there's no question valuations are out of line when measured against much more conservative U.S. and European standards. Paying an average of 24 to 28 times earnings seems patently silly when our markets suggest that single-digit valuations represent the best investment opportunities.

If you take a deeper look, however, that silly feeling disappears pretty quickly.

Those market valuations do seem out of whack when measured against the backdrop of a problem-plagued and far-more mature economy such as the United States. That really shifts your frame of reference. Or, at least, it should.

Asian markets are radically different than their U.S. counterparts, which is why, when faced with growth rates that are literally five to 10 times higher than our own, I'm okay with that and you should be, too, at least in measured doses.

The bottom line is that Asian markets are where the growth is and will be which is why the amount of capital headed that direction is accelerating.

Make sure you don't miss it: If you don't get in on the ground floor now, chances are you'll have to risk a climb through an upstairs window later.

Actions to Take: The flood of money headed for initial-public-stock-offering deals throughout Asia – and especially in China – staggering. But it's not a bubble. That means it's one of those powerful trends that's not be to be missed. And that raises the question: How best to play this trend.
For starting out, I recommend the following two investments:

  • Morgan Stanley China A Share Fund (NYSE: CAF): Recent Price: $31.07 – This closed-end fund invests in China "A" Shares listed in Shanghai and Shenzhen. As such, it's one of the few ways individual investors can participate directly inside China's rapidly growing domestic market.
  • iShares MSCI Hong Kong Index (NYSE: EWH): This U.S.-listed ETF tracks the broader Hong Kong markets and all publicly traded securities there. While there's no doubt you'll sweep up the trash, odds are good you'll also collect a few diamonds as newly listed IPOs flock to the markets there.

[Editor's Note: Money Morning Chief Investment Strategist Keith Fitz-Gerald predicted a number of years ago that investors would see a big swing in IPO deals toward Asia, and specifically China. U.S. companies will list there. And they will even seek to raise more and more of their money there as the global capital markets become less Wall Street-centric.

That's the kind of foresight that's made Fitz-Gerald such a success as an investor - as is evidenced by his near-perfect record with his Geiger Index advisory service. If you missed out on part or all of that run, don't despair: He's looking for the same kinds of profit opportunities in his newest service, The MicroQuake Alert. To find out more about MicroQuake, please click here.]

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Alan | November 3, 2010

    My idea is: technically most Asia stock markets especially China would be doubled in next 2-3 years.

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