Tough times for IPOs

There was bad news this week for Branston and Branson. Premier Foods, the group behind the Branston Pickle brand, was forced to cut the price of its initial public offering from 230p-260p a share to 215p, while Sir Richard had to trim Virgin Mobile's float price by 20%. Institutional investors are "not in the mood to be talked into paying high prices" for new issues, says Patience Wheatcroft in The Times: Sir Richard and his investment bankers originally insisted that Virgin Mobile, which doesn't even control its own network, deserved a higher valuation than market heavyweight Vodafone. Virgin and Premier are the latest in a raft of companies whose offer prices proved overambitious, says Paul Durman in The Sunday Times. Umbro, the sports-goods group, had to slash its float price by almost 50% to get the issue away, and M&C Saatchi also had to cut its price.

One reason for the lacklustre state of the market is that other recent IPOs have done badly: shares in Ark Therapeutics, for instance, have fallen 25% since its debut in March. Investors are also put off by the number of companies being floated by private-equity groups, since these offer scant scope for gains from cost-savings. But the key reason is the state of the overall market, says Tony Jackson in The Sunday Telegraph. It has been "seized by a kind of glacial calm" since the beginning of the year, and this kind of suspense makes investors nervous. Given recent weak US economic data, the ongoing concern over a possible Chinese slowdown, and the prospect of lower UK growth next year as rates rise further, investors are right to be nervous, warns Bill Jamieson in The Business.

But if investors are so worried, then why has the FTSE 100 outperformed the mid-cap FTSE 250 index by just 2% since the start of the second quarter? asks Lex in the FT. The FTSE 100 is dominated by defensive stocks that should do well in times of uncertainty, while the FTSE 250 is more cyclical - hence its 28% outperformance of the blue chips since the March 2003 low. The answer is that pension funds are still ditching equities and this is mainly hitting larger stocks, says Morgan Stanley. The 15 biggest FTSE 100 stocks gained just 4% over the past year, while the rest nearly matched the 24% gain by the FTSE 250. But even if pension funds carry on selling equities, the FTSE 100 is likely to outperform the mid-caps over the rest of this year. Slower growth and higher interest rates should encourage investors into defensive shares, particularly the top 15, which offer some of the market's juiciest yields.

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