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The Fed’s monetary policy angle has markets in a tangle

The question on every investor's mind as we edge through January is whether IPO markets can repeat last year's success.

To be sure, 2021 was the year of the IPO, with debut listings accounting for 41% of global equity market issuance—the highest level since 2000 as follow-ons and convertibles trended down. All told, global IPOs raked in US$592 billion in 2021 versus US$321 billion in 2020, propelled by peak valuations in secondary markets and investors hunting for returns amid depressed yields.

The fourth quarter saw Rivian Automotive ride the largest public market debut of 2021, demonstrating demand for an electric vehicle alternative to Tesla. The deal rounded off a record year for IPOs in the US. In all, new issuances in Q4 raised nearly US$54 billion, bringing the total amount of capital raised by US IPOs to around US$300 billion.

It's not yet possible to drive a Rivian model off the lot, but that didn't stop the carmaker leaving others in its dust with its eye-popping US$13.7 billion IPO in November 2021.

Following an early rally, the stock has since slumped and is currently trading below its float price, but its performance is far from a flop—in the past two weeks, sentiment has turned.

Minutes from the Fed's Federal Open Market Committee meeting in December 2021 showed that the bank is more than ready to begin tightening monetary policy to curb inflation. A rate hike is now anticipated in March as well as a potential shrinking of its bloated balance sheet before the year is up.

This has rattled equity markets. The tech-heavy Nasdaq is down more than 8% since January 3, 2022.

Conflict of interest 

In the US, deal flow has been dominated by tech and healthcare. The former has been in the spotlight throughout the pandemic and related stocks surged in 2020 and much of 2021 before hitting volatility.

Software has been a great enabler in the past two years, but the upward march of tech-heavy indices hasn't just been about earnings growth. Government stimulus and a virtually non-existent interest rate have been a sugar rush for equities and tech in particular.

The question now is whether a more hawkish stance from the Fed will rein in the next tech public market hopefuls and US IPO activity more generally. The received wisdom is that rates will have to rise in order to stem spiraling costs, a move that is prompting investors to go risk-off.

However, contrarians see something else playing out. Amid supply chain logjams, inventories have been overstocked and pent-up consumer demand may already be fizzling out as the pandemic shows signs of abating.

If this counter view is correct, talk of inflation may soon turn to deflation and that will surely turn hawks to doves.