MARKET TALK: Q2 2023 OUTLOOK
Primary equity issuance is poised for a slight recovery in the second quarter, yet concerns over higher interest rates for longer could keep a lid on deals.
By Charles Newbery and Rodrigo Alonso Cruz
After coming to a standstill at the end of 2022, primary equity issuance in Latin America is poised to gain this year, as issuers line up deals on expectations that tightening conditions in the global financial markets will end.
“The pipeline is certainly building up,” says Billy McArthur, head of Latin America equity capital markets at UBS in New York. He expects the first initial public offerings and follow-ons in May or June, before picking up in September and October.
It’s still uncertain exactly when the conditions will improve. At the start of the year, expectations swelled that major central banks were poised to end their aggressive monetary policy tightening, helping to revive economic growth and corporate valuations. But a report of higher-than-expected inflation data in the United States at the end of February put a damper on those hopes, rekindling predictions that the US Federal Reserve will still need to raise rates and keep them elevated for longer. Those expectations were themselves upended following turmoil in the global banking sector in March and a return of generalized investor anxiety.
There still are a few attractions for investors, however. “Latin American equities are extremely cheap, not only relative to history, but also relative to global equity markets,” Tom Boyle, a director at Lazard Asset Management, said during LatinFinance’s Latin American Capital Markets Summit in New York in January. “As fundamentals come back into play, it will help companies to list again.”
So far this year, activity has been lackluster. There were no IPOs in the first six weeks of the year, compared with two in the year-earlier period that fetched a total of $480 million, according to data from Refinitiv. That’s down from 17 deals for $4.5 billion in the same period of 2021. Follow-ons fared better at four deals bringing in $412 million in the first six weeks this year. But that was sharply down from the nine deals for $2 billion in the year-earlier period, the data show.
Paltry activity on the primary equity market early this year
One reason for the sluggishness has been Brazil, which accounted for around 85% of the region’s equity capital market volumes over the past three years. A new leftist government is raising concerns on the political front, including an attempt to interfere in the central bank over interest rates and inflation targets. This is dampening issuance there, but not totally.
A large flow of capital into Brazil’s secondary stock market over the past few months has revived prices from a dip in mid-2022, including several firms that went public during an IPO boom in 2020 and 2021. While a lot of those IPOs are still trading down, the recovery in their share prices is a sign of investor demand.
“Investors are open to put capital to work for the right stories.”
– Billy McArthur
“Investors are open to put capital to work for the right stories,” McArthur says.
Seacrest Petróleo, a Rio de Janeiro-based oil and gas company, found demand, but outside of Brazil. The company, owned by Bermuda-based Seacrest Capital, raised NOK2.66 billion ($258 million) in an IPO in February on the Oslo stock exchange in Norway to increase output in Brazil, choosing a foreign listing because of the high rates in Brazil and still underpriced IPOs from 2020-21.
The most recent IPO on B3 stock exchange in São Paulo was in late August 2021 when fertilizer company Grupo Vittia raised BRL382 million (then $74 million) after pricing its shares at the bottom of the target range. A number of companies have postponed IPO plans since, including water company BRK, the local subsidiary of Chilean retailer Cencosud and hamburger chain Madero.
Elsewhere in Latin America, activity could gain as well. Argentina has a presidential election in October, and depending on who wins, that could lead to an influx of investor capital that would spark new deals, in particular in defensive sectors like energy and utilities, but also in e-commerce and technology companies with foreign revenue streams.
Mexico’s pipeline has been growing, led by a surge in investment in nearshoring activities, as companies seek to shorten the supply chain to sell to the United States. The potential listers include infrastructure and development companies, particularly in the energy, manufacturing, transportation and logistics sectors, McArthur says.
“We expect these will be among the most relevant sectors for investors,” he says.
This could help sway Mexico’s Kueski to dust off its IPO plans, but in the meantime, it will focus on running a tight business, says Andrew Seiz, head of capital markets and investor relations at the company.
“In a market like this where access to capital is challenging for everyone, I think inevitably growth plans, capital plans have to be reconsidered, readjusted,” he says. LF