We praise markets and applaud them, implicitly ignoring the limits to the power of price. Not only are markets universally acknowledged as the only plausible way for economic life to be organized, we have even extended market-like patterns for the non-economic behavior of the universe.
We ignore that markets rarely operate efficiently, often being unable to distinguish between gallimaufry and reality. It seldom functions without increasingly complex regulation, and, despite this, we accept the outcome of markets as inevitable.
It is in this context that recent commentary of the recent IPOs need to be scrutinized.
Ignoring the obvious
Market chatter regarding the secondary performance of the recent IPOs listed on DFM have led to fresh commentary on its status as a haven for channeling investments by expatriates, who would rather invest in more liquid foreign markets despite the disappointing performance that they have exhibited in the last year.
In other words, there is an asymmetry operating here: foreign markets cannot 'do wrong’ simply because they are more mature and more liquid by their very nature. Domestic markets on the other hand are not.
This leads to rather perverse outcomes: we seem to have greater levels of confidence in crypto markets, than we do in the local capital markets. (Similar examples were made in the case of real estate markets a decade ago in comparison to the then latest technology ‘fads). In the case of these present day beliefs, we don’t necessarily feel that we know that our beliefs are true: just that it is known, that someone else somewhere else has worked these things out in detail. The trouble is that markets are not really visible from any single vantage point - only the separate transactions that make them up.
From them a grand swirl of prices formed emerges by all the interactions of all the buyers and sellers. We make markets: the thing that we make together in turn acts back upon each one of us as an independent force.
We could react to this by describing it as part of a complicated phenomenon, and exploit the language of power to capitalize on its movements. Instead, we prefer to look at it simplistically, as a truism, a fate that cannot be escaped, its verdict that must be bowed down to.
This is simply false, and we can take it further: markets are silver and gold, the work of people’s hands. They merely reflect an agglomeration of prevailing sentiments, not any form of justice or compassion. In Dubai, as is the case in the Middle East, there has been an explosion of corporate activity, and we are still in the very early stages of this phenomena. We know that there will be many more such listings, and with each listing, there will be a multiplicity of choice in terms of allocating investment, both from domestic as well as international players. And these short-term market gyrations are to be capitalized on, or alternatively, avoided.
How do we know this? We know that asset formation (and accumulation) is the foundation of any modern economy, and that this manifests itself in the form of a cornucopia of factors that exert themselves over time. From shareholder activism, to relative price arbitrage, to value discovery as greater number of players start to interact with the marketplace. This is not to argue that every IPO will be a success in terms of windfall gains (a relic of the zero interest rate era that dominated the markets for the past two decades). Markets do not look after people, and can be madder than any of those who participate in them.
Value investing comes into play
We know however that the greater the number of participants, the lower is the probability that there will be systemic inefficiencies in individual companies. And value investing - which is the only kind of investing there is over the long term - will lead the floor to rise as price discovery becomes more efficient and precise over the longer term. (Companies that trade at below their book or replacement values will naturally rise over time).
We have already seen value discovery in companies like UPP, Tabreed, Emirates Steel and others. Companies that distinguish themselves from each other are the ones that can allocate capital more efficiently, but more importantly, attract players that perceive this fact to be true.
The Americana IPO adds to the liquidity torrent and the multiplicity of choice that investors have, but IPOs are not a separate asset class, rather a part of the overall capital market. These markets act as weighing machines over time. For a city that has excelled in every endeavor that it has participated in thus far, there is nothing to suggest that - short-term blips notwithstanding - the same will not be true in its financial markets.