The US stock markets today are the mainstay in most of the global portfolios of Indian investors and are the home to several innovative companies, that are building new products and services across a range of sectors.
These include the more familiar innovative themes, such as artificial intelligence and cloud computing, as well as newer areas, such as alternative foods.
“Companies like UiPath and C3 AI are innovating in the areas of robotic automation and artificial intelligence, building a Software-as-a-Service (SaaS) offering for businesses. In cloud computing as well, several companies such as Crowdstrike, Zscaler and Datadog are offering specialized services to help businesses better manage cloud-based offerings,” said Viraj Nanda, chief executive officer, Globalise.
Moreover, there are also a number of upcoming IPOs that investors are looking forward to, across a range of sectors.
In terms of initial public offers (IPOs), Instacart (grocery delivery service), Rivian (electric vehicle manufacturer), Grab (Southeast Asia’s leading super app providing services like deliveries, mobility and financial services), Discord (VoIP, instant messaging platform) and NextDoor (hyperlocal social networking app for neighbors) are a few of the big-ticket IPOs that investors are eagerly anticipating in the second half of 2021.
As of today, Indians can invest in US IPOs, but they buy such stocks once they are listed.
Things to keep in mind
It is important that investors go through a diligence process before investing in newly-listed companies.
“These companies generally have no financial track record in their filings, sharing unaudited historical financial statements. Their management also generally has a thin track record in terms of leading a public company, and therefore investors need to rely on how they have operated as a private enterprise. Newly-listed companies also demonstrate higher volatility for their first few earnings seasons, as the market aligns on expectations and assesses them on delivering against stated targets,” said Nanda.
Investors should also keep in mind that initial institutional investors look to exit their holdings within the first 12-18 months, with retail investors buying in, which leads to additional volatility. Therefore, a fundamental assessment of the company and its valuation is important to guide an investment decision.
The China factor
The Chinese government clamping down on private companies that have grown extremely large has become a major cause of concern for Indian investors who have been diversifying their portfolios outside of India.
Shares of Chinese vehicle-for-hire company, Didi Chuxing Technology Co., which was listed on the New York Stock Exchange (NYSE) in late June, slumped after China regulators blacklisted 25 apps associated with the platform.
In the past, the Chinese government’s crackdown resulted in the collapse of Ant Group’s initial public offer (IPO) in November 2020, as well as anti-trust investigations into Alibaba Group Holding Ltd and Meituan.
However, experts say that this might benefit established FAANG stocks.
“Companies like Coupang (CPNG), the largest online marketplace in South Korea, Sea Ltd, the leading internet platform in Southeast Asia, and MercadoLibre (MELI), an Argentine company offering e-commerce and online marketplace services across Latin America, are all listed in the US and could provide investors with exposure to a similar theme as the Chinese companies. In addition, some of the money being pulled out of the Chinese companies would also get reallocated to US tech players, especially the FAANG stocks,” said Nanda.
A safer route
There has been a strong demand for IPOs as investors are looking to invest in new companies that provide access to differentiated products, themes and geographies.
For investors who are looking for an alternative way to build exposure to newly-listed companies, the exchange-traded fund (ETF) route offers indirect exposure into a portfolio of newly-listed companies.
For example, Renaissance Capital offers an ETF that focuses exclusively on the US IPO market. This fund, Renaissance IPO ETF (Ticker: IPO), provides exposure to the most significant newly public US-listed companies in a portfolio.
“Moreover, ARK’s family of funds, managed by Cathy Wood, has a mandate to invest in a broad spectrum of innovative companies, including recent IPOs. The funds, including the flagship Innovation Fund (ARKK) and the Next-Gen Internet Fund (ARKW) bought into Robinhood soon after its listing, and also include other newly-listed companies such as Coinbase and Roblox,” added Nanda.
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