MARKET TALK: Q4.2020 OUTLOOK
Interview with Roderick GreenleesGlobal Head of Investment Banking, Itaú BBA
By Joe Rowley
Latin American equities recovered some of their ground since a precipitous fall in March sparked by the COVID-19 pandemic, but still remain stubbornly below the levels at the start of the year.
The benchmark MSCI EM Latin America equity index, which tracks large and mid-cap stocks across six emerging markets, remained almost a third lower by mid-September after hitting a plateau over the last quarter, according to data provider Refinitiv.
Brazil’s equity markets tell a similar story although a stronger recovery since March has helped pull up the emerging market average. The Ibovespa stock market index closely tracked the MSCI EM Latin America equity index on the downturn but has increasingly diverged from it on the upswing, indicating a stronger recovery.
After losing 45% of its value at the onset of the coronavirus lockdown in March, the Ibovespa rebounded to sit 14% below the level at the start of the year by mid-September.
Brazil’s favorable macroeconomic climate has helped burnish its equities market. Faced with an historically low interest rate of 2% and low inflation, return-hungry investors have shifted away from fixed return instruments towards alternative assets, such as real estate funds and diversified equity funds, according to Roderick Greenlees, Global Head of Investment Banking Department at Itaú BBA in São Paulo.
“Even though a small portion came to equity, it was enough to set the [Brazilian] market on fire,” he added.
Evidence of the surging appetite for Brazilian equities can be seen in the sharp uptick in the number of companies filing for initial public offerings (IPOs) on São Paulo’s B3 Stock Exchange.
By mid-September almost 60 companies registered for IPOs since the start of the year, out of which a dozen companies successfully launched equity offerings.
Even when considering a four-month period between March and June when just one IPO came to the market, Greenlees predicts 2020 will beat the previous highwater mark for IPOs and follow-on equity offerings set in 2007.
“Brazil’s [equity capital markets] may not beat the number of IPOs [in 2007], but it will certainly beat the value,” he said.
Brazil registered 59 primary offerings in 2007, raising around BRL 33.2 billion. Add in secondary offerings and the amount of capital raised grew to BRL67.25 billion. So far this year, a dozen IPOs have raised BRL8.76 billion from primary offerings and BRL36.98 billion with secondary offerings included, according to data from securities regulator CVM.
However, the rush to register IPOs has not been without risk, with some issuers forced to lower their price estimates or pull their offerings altogether due to soft demand.
Three real estate companies - You Inc Incorporadora e Participações S.A, Alphaville Urbanismo, and the Riva 9 subsidiary of Direcional Engenharia SA - cancelled or postponed their offerings in July and August. Two other issuers - Brazilian drugstore chain Pague Menos and homebuilder Lavvi Empreendimentos Imobiliários - priced below their target price ranges.
Nevertheless, Greenlees detects an emerging trend in the IPO market with the registration of a clutch of start-ups at the beginning of September. Most technology companies would previously have gravitated towards the deep pockets and high valuations on the US’s Nasdaq Stock Market, he said.
“Brazilian tech companies now seem to be considering the local markets and deciding they can get higher valuations on the B3,” he added.
With dozens of offering in the pipeline yet to price, Greenlees predicts the total could reach between 30 and 40 IPOs and 20 or 30 follow-on offerings by year end.
“It is very good out there at the moment,” he said.