LIVE MARKETS-The $410 billion trade: How the AI IPO boom could reshuffle indexes
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THE $410 BILLION TRADE: HOW THE AI IPO BOOM COULD RESHUFFLE INDEXES
With markets anticipating a hot streak of IPOs involving the three biggest private AI companies, demand is expected to be high. But what does this increase in competition mean for index rebalancing and would it mean a selloff in the Mag 7? Not necessarily.
J.P. Morgan analysts estimate that the initial inclusion of the companies, SpaceX, OpenAI and Anthropic, in the indexes could lead to passive rebalancing demand of around $40 billion. That is with their base case of the three heavyweights accounting for a combined market cap of around $3.5 trillion and 4% of shares counting toward free float.
After the end of the lockup periods, typically six months, free float could rise to roughly 40%. This increase is largely a mechanical reclassification of existing shares rather than actual selling. It would require index funds to significantly increase their holdings, generating an additional $370 billion in demand and bringing total rebalancing-related buying to about $410 billion.
This demand could be met by a mix of companies releasing previously repurchased shares and non-strategic investors selling to passive funds.
On the index level, the rise in weightage of the companies would come at the expense of companies they replace, and affect the weight of the biggest tech names including the Mag 7.
Still, the rebalancing would not mean actual selling of existing big tech names if the pattern of strong and steady inflows into passive equity funds continues, as those flows could be directed to the new entrants.
(Twesha Dikshit)
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