The U.S. stock market enjoys a reputation as the most efficient place to match up companies with new investors. But recently, Europe is giving the Americans a run for their money.
U.S. initial public offerings got off to a roaring start in 2014, with debuts from several high-flying tech companies like online restaurant takeout operator GrubHub and King Digital, creator of hit mobile video game “Candy Crush.” Some $19.7 billion in IPO shares have been sold so far in 2014, marking an 81 percent rise from the same period a year earlier.
Yet that’s smaller than the $22.5 billion in IPO shares sold across Europe, where volume has quadrupled from the same part of 2013. If Europe keeps its lead, it will be the first time since 2007 that it sees more issuance than the U.S.
How has Europe pulled ahead? One issue is the extreme volatility in the U.S. market in the last two months, especially in the technology sector. While the flow of offerings has continued in the last few weeks, the schedule has been fraught with delays. Some deals have been pulled altogether, including Globoforce Group, a “leading provider of a cloud-based, social recognition solution.”
Indeed, many tech and biotech companies with little or no profits have dominated the issues so far this year. Some 15 percent of the new issues in the U.S. this year were in the health-care sector and 21 percent were in the technology sector, according to Dealogic. By contrast, only 7 percent of European IPOs were in health care and a mere 3 percent were in technology.
The bigger drivers of deal volume in Europe are more traditional industries like retail, which accounted for 19 percent of volume so far this year.Poundland, for instance, is a U.K.-based discounter that has been in business since 1990 and has shown steady profits for the last few years. It raised about $720 million from a London IPO in March.
U.S. investors looking for European investments may also have played a role. Goldman Sachs points out that net purchases of European stocks by U.S. investors have totaled $120 billion over the last 12 months, near a record high. History suggests that such inflows have remained positive for some time after topping out in past cycles, the bank says.
There’s reason to believe demand will continue, given the European recovery is probably still in its early stages. The financial crisis lingered longer in many parts of Europe than it did in the U.S. Unemployment remains near record levels in Spain and Italy.
Of course, the market has already risen to some degree on hopes of a recovery. Highly cyclical stocks like Italian broadcaster Mediaset have more than doubled in the last 12 months as investors bet on early signs of improvement in the local advertising market. With Mediaset trading at 28 times consensus forward earnings, it’s hard to see much upside.
European IPOs, however, can still offer decent returns. The average one-day return on European equities so far in 2014 was 7 percent and the average stock remains 3 percent higher since listing.
Europe has had its share of duds and a few more could spook investors. Italian luxury company Moncler went public last year with much fanfare, but investors who bought the stock in the open market the day it began trading in December have lost about 15 percent.
And Europe’s lack of technology behemoths probably will prevent it from keeping up with the U.S. in the long term. Indeed, the expected IPO of Chinese e-commerce giant Alibaba could single-handedly throw the U.S. back into a healthy lead. But with a pipeline of less flashy companies, Europe could remain a quiet success for some time.