Royal Mail shares expecting a bullish market debut but beware of volatility

<p>Royal Mail shares are expected to enjoy a bullish reception when the company makes its market debut on 11th October, giving shareholders an instant profit […]</p>

Royal Mail shares are expected to enjoy a bullish reception when the company makes its market debut on 11th October, giving shareholders an instant profit thanks to a conservative original valuation and strong demand.

Shares had been expected to float between a range of 260p and 330p but confirmation came through late on Thursday that prices were confirmed to open at 330p, valuing the company at around the £3.3bn mark. Yet there is growing confidence that shares could in fact trade far above this list price meaning that shares are likely to debut strongly when the company opens for conditional trading on Friday and full trading next Monday.

City Index will be offering clients the ability to spread bet and CFD trade Royal Mail shares shortly after the markets open for conditional trading on Friday 11th October.

So how will Royal Mail shares trade?

Make no mistake, all evidence points to a strong market opening for Royal Mail shares and grey markets are already pricing shares close to the 400p level.

Now that does not mean shares will definitely open at 400p and a whopping 21% above the upper range of their confirmed listed price (330p) – though they very may well do and even higher – this does echo the bullish sentiment that surrounds Royal Mail shares right now and is extremely hard to ignore. Paddy Power had odds of 15/8 that Royal Mail shares would close above 450p on Friday and 3/1 from 400p to 425p.

Stockbrokers had to open over the weekend and brokers stayed at their desks into the late evening hours on Monday and Tuesday to be able to cater for the mass public interest in picking up the shares that were on offer to retail consumers i.e. not institutions. Vince Cable told Parliament on Wednesday that the share offer was seven times oversubscribed. This does not 100% guarantee shares will rally far above the confirmed 330p listed price but certainly this is a positive indicator.

The demand has no doubt been influenced by calls that the government has fundamentally undervalued Royal Mail by failing to take into consideration the full scale of property values under current ownership.

Politics and markets

We should not underestimate the impact of politics on the markets. The impasse on Capitol Hill, which is keeping the US government in partial shutdown and the looming Debt Ceiling October 17th deadline serve as timely reminders of this.

Regarding the Royal Mail, the coalition government can ill afford an embarrassment. That would come in the form of two scenarios;

1. Royal Mail share prices tanks

This would be a huge embarrassment to the coalition government at the time when both the Conservative and Labour parties have set their stools out for the 2015 election following their respective party conferences. If share prices plummet following the IPO, it would be a disaster for the government, who would be seen as making a hasty decision to float the near 500-institution prematurely, leaving Royal Mail in a vacuum of instability and uncertainty at a time when the float was designed to do the complete opposite.

In this sense, it is unthinkable that the government would structure the IPO to allow this. It is perfectly feasible that the IPO launch price has been designed (as they often do) to attract buyers early and give the IPO some much needed debut strength.

2. Royal Mail share price surges

If share prices rally too much on the initial days after the floatation, the government will be attacked for offering shares too cheaply, leaving the tax payer short changed. This is a manageable risk for the government, however.

And so the task the government faces is leaning more towards the second scenario. IPOs are structured in a way that attract buyers and give the floating company early price stability. Sometimes this works, sometimes it doesn’t, but we should never forget that this is one of the key tasks given to banks Goldman Sachs and UBS, who are managing the launch.

Beware of the first month of trading

IPOs can be hugely volatile. Facebook shares debuted at $38 a share but quickly fell $17.55 after just three months of trading and have taken over a year to trade back above the $38 level. Compare that to LinkedIn, whose shares debuted at $45 a share and rallied as much as 171% to a high of $122 on the first day alone, before falling back down to $60 within a month.

There is also the danger that over-hyped, over-confidence and overly high expectations can be easily and quickly disappointed. The market expects a strong debut. If this is not forthcoming or shares start to sell off in the first week, this could trigger some panic from investors expecting a lottery figure.

So expect price volatility on the first day and weeks in fact, following Friday’s launch. IPOs are best judged a success after the first two months of trading. That’s not to say there won’t be multiple trading opportunities, particularly for day traders who can take advantage of the additional price volatility.

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