High valuation and limited liquidity make many Euronext Growth companies extra vulnerable to a correction, according to manager Marius Borthen. He fears the consequences of rising US government interest rates.
– We will not go back further than to October where several of these companies fell 25-30 percent in a couple of weeks, says Marius Borthen, manager of the hedge fund Blueberry Capital.
High pricing and strong price development mean that the companies are still in line to be listed on the Oslo Stock Exchange, and in particular the unregulated marketplace Euronext Growth.
Borthen himself expects an “explosion” of listings in the first half of the year, but sees an increasing risk in investing in newcomers to the stock exchange.
Ten-year government interest rates in the US have skyrocketed, and the manager believes this development will most likely be the trigger for the next correction in the stock market.
“When that happens, there are many Euronext Growth cases that are vulnerable, with high valuation, ditto growth expectations and varying degrees of liquidity in the stock, which can quickly dry up completely when the market is not as hot anymore,” says Borthen.
– This has happened in all corrections and downturns in the last 30 years and will probably happen in 2021-22 as well. So certainly smart to hold back a bit these days, he adds.
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Concerned about liquidity
Investors who participated in the issues ahead of this year’s eight IPOs have so far received a return of close to 60 per cent on average, according to E24’s calculations.
By far the most lucrative has been Horizon Energy, with a rise of a whopping 284 percent. Only one of the new companies, the land farmer Proximar Seafood, has given a negative return.
At the same time, seven new Euronext Growth listings are on the way in the next two weeks, and several brokerages have stated to E24 that they are working on a dozen projects for the first half of the year.
– The question is whether it will be lucrative to participate in these deals, because there may be more supply than demand. And then we will see the same as we saw in October last year, when many of the stock exchange listings flopped and fell sharply afterwards, says Borthen.
Borthen explains the skepticism about the IPOs on the mini-putt exchange as follows:
– If you are a larger fund, you will not get out. The positions will be completely illiquid, the manager emphasizes.
The sale triggered a sharp discount
On Wednesday last week, E24 wrote that investor Øystein Stray Spetalen had to give a discount of as much as 20 percent to dump his shareholding of around four percent in the fish farming company The Kingfish Company.
Things went a little better when the main owner Valinor in the car charging company Zaptec put 42 percent of its shareholding up for sale on Monday this week. The shares were eventually sold for a discount of seven percent from the closing price on the same day.
Spetalen was the cornerstone investor in Kingfish: Sold shares with close to 20 percent discount
The median turnover in the Zaptec share over the past 30 days has been NOK 49 million, according to trading data from Infront. For Kingfish, the same figure is just under 800,000 kroner.
Borthen emphasizes that he has not invested in any of the companies, and therefore does not know them in detail.
– But how much discount you have to give is a direct effect of the interest in the market to invest in the respective company. Zaptec is super hot and has delivered figures above expectations for quite some time. Therefore, it is not so surprising that the brokerages manage to set the investment at a smaller discount on the closing price than in other transactions, says Borthen.
– Actually a sign of weakness
Borthen now sees many similarities with other bull markets, ie strong periods of upswing – as before the financial crisis
– My big concern now is that ten-year government interest rates in the US have risen from 0.5 to 1.3 percent in a short time. In a relative perspective, it is a rather brutal change, especially because it does not seem to stop now. I predict that 1.5 percent will be a critical point for the stock market, says Borthen.
Several experts have linked the rise in interest rates to the Democrats’ election victory, and the prospect of a stronger US fiscal policy.
Higher interest rates are generally considered negative for the stock market, as it increases investors’ discount rates. This reduces the present value of the future cash flow from which the shares are valued.
– What you see now, with a rise in interest rates in the ten-year period and a weak dollar, is actually a sign of weakness for safe investments in the USA, says Elisabeth Holvik, chief economist at Sparebank 1 Gruppen.
– Large investors now see that they are unable to maintain purchasing power by investing the money in US government interest rates. This is also behind the rising oil price, says Holvik.
I think the central bank will come to the rescue
She points out that low or negative real interest rates over a longer period mean that investors increase the risk in their investments, in order to achieve a higher expected return than they now get by sitting passively in interest rates.
– Then investors are looking for new trends, such as green investments, and commodities. There has been a trend over many years with an increasing financial investment in commodities and more exotic investments using derivatives, also in the commodity markets, and this increases volatility and amplifies trends, says Holvik.
She does not see any major risk that higher interest rates on the US ten-year-old will lead to a correction in the stock markets – at least not for a while.
– As long as the US Federal Reserve has said that they will keep interest rates low for a long time, and that the most important thing is to stimulate the economy, they will probably come to the fore if long-term interest rates rise further, Holvik says.
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