The decline of US stocks

By Felix Salmon
May 26, 2011
Aaron Lucchetti takes a detailed look at the US decline in global stock-market listings today, and finds a bunch of US companies deciding to list overseas:

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Aaron Lucchetti takes a detailed look at the US decline in global stock-market listings today, and finds a bunch of US companies deciding to list overseas:

In all, 74 U.S. companies have done IPOs in foreign countries since 2005, raising about $13.1 billion, according to Dealogic. That is a small fraction of the more than 650 U.S. companies that have gone public on U.S. exchanges since 2005. Still, such capital raising abroad was much less common before.

The numbers here seem high to me: if you’re a US company which has gone public since 2005, there’s a greater than 1-in-10 chance that you’re listed overseas. 74 companies is a lot of companies: we’re clearly not talking about one or two exceptions here. And if you look at the example given in Lucchetti’s piece, the Seattle-based but London-listed water-purification company HaloSource, there’s no obvious reason to discount it as some unique outlier.

I would love to see a quantitative comparison here, however, rather than the qualitative “much less common.” Did some small but significant proportion of US companies always list abroad? I guess what I’d really like to see here is a chart of the ratio of foreign IPOs to domestic ones, for US companies, on say a rolling five-year basis, going back as far as there’s data. Does the current level around 10% constitute a big spike upwards?

What seems certain is that the US stock markets just aren’t particularly interesting when it comes to new listings any more. LinkedIn made a big splash, yes, but mostly just because of its huge opening-day pop. And it wasn’t even the biggest IPO last week — Glencore raised much more money, has a much higher valuation, and chose to list in London and Hong Kong. And as Bob Greifeld noted when he announced Nasdaq’s bid for the NYSE, In 2010 the US generated only 16% of the capital raised worldwide and attracted only one of the 10 largest global IPOs.

Meanwhile, this week’s big share offering — of AIG — is looking decidedly sluggish, as though the US stock market really isn’t capable of digesting such things. (To be fair, the syndrome is global: the same thing seems to be happening to Glencore as well.)

Lucchetti waves his hand vaguely at the economic implications of all this, quoting a venture capitalist as saying that “we’re losing the ecosystem that has helped buoy the US economy over decades.” But a venture capitalist would say that — she just wants as many ways to exit as possible.

The more immediate implication, I think, is for individual investors. Even today, most US investors think of stocks in terms of US listings and tickers; if you watch CNBC all day, you could be forgiven for thinking that nothing matters unless it has a US ticker. But realistically, anybody investing in equities over a long-term time horizon is going to have to have a comprehensively global outlook. And while millions of investors still get their hands dirty with individual US stocks, buying this one rather than that one, trying to do anything remotely similar with global stocks is a non-starter. Just buying them is hard enough; doing real homework on them and picking between them is almost impossible, given the huge size of the global stock-market universe.

As a result, investing is going to have to become much more index-driven than it is right now, dominated by top-down global asset-allocation decisions rather than bottom-up stock-picking. And that in turn is going to drive correlations higher and increase the amount of systemic risk in global markets. I also suspect that the decline in US listings presages a relative decline in US markets. As US investors begin their exodus out of domestic stocks and into global stocks, the US stock market is likely to underperform its foreign counterparts. As they say, follow the money. It’s not here, any more. It’s there.

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