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The Brazilian stock market is in its longest period without a new IPO in at least two decades. Could the drought on Latin America's largest stock exchange be over?
At least that's the conversation among investment bankers and asset managers on Avenida Faria Lima, Brazil's version of Wall Street.
With monetary easing underway at home and soon expected from other major central banks, they see conditions for a revival of IPOs in the region's leading economy.
“There is a huge amount of pent-up demand because we haven't had an IPO in Brazil for more than two years,” said Roderick Greenlees, global head of investment banking at Itaú BBA. “I would expect something to happen in the first half of this year. Our base case is between three and five IPOs in 2024.”
Even in the context of a global slowdown in IPOs, the dry spell on the B3 stock exchange in São Paulo is striking. His last debut took place in September 2021, bringing a few record-breaking years to an abrupt end. The year 2021 was a high point for IPOs, with R$65 billion raised in 45 transactions.
A key factor was the Brazilian Central Bank's (BCB) early and aggressive approach to inflation, which raised its key interest rate to double digits from an all-time low of 2 percent during the Covid-19 pandemic.
Higher borrowing costs then dampened a structural shift among Brazilian savers from fixed-interest securities to equities. Political uncertainty during the 2022 presidential election also weighed on confidence. Market forecasts now assume that the key interest rate will fall below the psychological threshold of 10 percent this year.
A potentially more critical variable for the reboot of Brazil's IPO is the timing and pace of the expected start of interest rate cuts by the U.S. Federal Reserve, as they have an outsized impact on global capital flows, according to market observers.
Optimists see other reasons for this. While domestic Brazilian institutions have exited equities, strong foreign inflows helped the local Bovespa index hit an all-time high late last year. Brazilian stocks were in the top third of emerging markets in 2023, with a return of 34 percent, compared with 10 percent for the broader FTSE Emerging All Cap Index, according to LSEG data.
Still, analysts say the South American country's stocks remain relatively cheap. Excluding oil giant Petrobras and miner Vale, Brazilian stocks are trading at a 12-month forward price-to-earnings ratio of 10, below the historical average of 12.3, according to BTG Pactual.
Most EM funds are overweight Brazil and positions have increased over the past year, says Pablo Riveroll, head of Latin America equities at Schroders. “Money from local investors is likely to flow back into stocks when interest rates fall, probably to single digits,” he adds. “The market expects this to happen towards the middle of the year, so IPO activity is likely to accelerate then.”
However, investors will be aware of the poor performance of recent floats. According to Nord Research, only 14 of the 69 stocks still traded from 2020 and 2021 are in positive territory. Financial concerns remain, given the government's commitments to additional spending. The BCB has said that proper public financial management is crucial to further reducing interest rates.
Eduardo Figueiredo, head of Brazilian equities at Abrdn, sees potential for IPOs in underrepresented sectors such as agriculture, technology, healthcare or infrastructure. He believes investors will be more selective and favor companies that are already profitable and generating cash. “Discipline will be higher this time because capital is more expensive globally,” he says.
Buyers will want larger issuances to ensure liquidity of shares after the IPO, adds Rafael Oliveira, fund manager at São Paulo-based Kinea. “This has been a significant challenge for many offerings in the 2020-21 cycle.”
Itaú BBA estimates proceeds from IPOs and other equity offerings in Brazil this year at R$50 billion to R$70 billion, with 25 to 35 transactions. Among the IPO contenders is subsea oil and gas services provider Oceanica Engenharia, which recently announced its intention to go public. Subsequent trades in the coming weeks will test market sentiment.
But with the Bovespa down so far in 2024, net foreign outflows from B3 in January and the Brazilian real down slightly against the dollar, the numbers on Faria Lima aren't getting carried away just yet.
“We expect the second half of the year to be full of IPOs,” said Marcello Lo Re, head of Latin American equity markets at Morgan Stanley. “It will be closer to the historical average, with the exception of 2020 and 2021, which were outliers.”
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