{"text":[[{"start":6.8,"text":"The writer is founding chair of Research Affiliates"}],[{"start":10.95,"text":"Will the SpaceX initial public offering break capital markets? No, but it will test their resilience."}],[{"start":17.5,"text":"During the dotcom bubble, hundreds of companies went public, yet only a handful raised more than $1bn. Over the following quarter century, IPOs grew steadily larger as businesses and the global economy expanded. The biggest was Saudi Aramco, which raised about $29bn in its 2019 IPO that valued it at about $1.9tn. SpaceX, Anthropic and OpenAI are expected to raise roughly $170bn combined at valuations that may exceed $4tn."}],[{"start":51.5,"text":"Index providers have been revisiting their rule books, some perhaps to ensure SpaceX can enter their benchmarks as soon as practicable. As an index provider — my company runs RAFI Indices — I am wary of opportunistic rule changes. And S&P has just announced it would not be changing its rules to fast-track mega-IPOs. But the indexing community remains haunted by Tesla’s addition to the S&P 500 in 2020. "}],[{"start":78.65,"text":"For index inclusion, S&P requires a company’s most recent quarterly earnings and the sum of its trailing four consecutive quarters’ earnings to be positive. This delayed Tesla’s inclusion until it was already among the world’s most valuable companies. Between the November 16 announcement that it would be added to the S&P 500 and its December 18 accession, Tesla rose 70 per cent. Less well known is that investors had expected its inclusion months earlier. From its March lows to its S&P admission, Tesla stock rose nearly 10-fold. Fairly or not, many viewed the delay as a black mark for the committee that oversees the index. "}],[{"start":118.95,"text":"Indexing is already reshaping markets. To borrow the old American Express slogan, “membership has its privileges”. Inclusion in a major index creates a vast pool of valuation-indifferent buyers. Index funds must buy additions and sell deletions regardless of price. Ongoing inflows create a constant stream of buyers for member stocks. "}],[{"start":null,"text":"
"}],[{"start":140.5,"text":"I estimate about $14tn tracks the S&P 500 directly, excluding benchmarked assets. Another $4tn tracks the Nasdaq and the Russell 1000. With the US stock market worth roughly about $80tn, these funds collectively own nearly one-quarter of the market and an even larger share of the stocks in their respective benchmarks."}],[{"start":161.85,"text":"Consider a thought experiment. Suppose SpaceX sells 4 per cent of the company in an IPO at a $2tn valuation — a capitalisation that would be equivalent to about 2.5 per cent of the US stock market. "}],[{"start":176.25,"text":"If the S&P, Nasdaq and Russell committees immediately added the stock at full market-value weight, I calculate index funds would need to buy more than $500bn of SpaceX shares, while only about $80bn would be available. In theory, the market-clearing price would be infinite. That breaks the capital markets."}],[{"start":196.25,"text":"Of course, this is not how indices work. New additions are generally based on the float, the amount of shares available to public investors. Under that approach, index funds might need to buy up to $30bn of stock from an $80bn float. That rocks the markets but does not break them. "}],[{"start":214.8,"text":"Markets can readily absorb a giant IPO. After absorption, index membership can create a durable valuation advantage. Compare the S&P 500 with the “Next 500”, the stocks ranked 501 to 1,000 by market capitalisation. Since 2012, the S&P 500 has dramatically outperformed them."}],[{"start":237.5,"text":"The conventional narrative is straightforward: the S&P 500 contains America’s best businesses, while the rest of the market offers laggards and perpetual disappointments. The fundamentals tell a different story when looking at cash flow rather than earnings under GAAP accounting standards as a cleaner measure of business performance. Over the past quarter century, S&P 500’s cash flow has grown about 3 per cent per year slower than the Next 500."}],[{"start":265.7,"text":"The implication is striking. Over the past dozen years, the biggest companies have won in the stock market not because their businesses grew faster, but because investors paid more for them. Their valuation premium relative to the Next 500 has risen to roughly 80 per cent, even as profit growth lagged."}],[{"start":286.84999999999997,"text":"SpaceX and the other giant IPOs will probably reinforce the advantages of index membership and widen the valuation gap between index constituents and the companies left outside the club. But unless cash-flow growth for the largest companies reverses course and begins to exceed that of the next tier of firms, investors should earn better long-term returns from the non-members than from the members."}],[{"start":318.49999999999994,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1780904386_2726.mp3"}