Friday, 18 January 2019

Pedalling hard

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  • The peloton rides during the 19th stage of the Tour of Spain “La Vuelta” cycling race

After a year of horrors the spasmodic nature of the region points to an upbeat outlook for equity capital markets. While there are uncertainties ahead, most of these are expected and quantified with optimism outweighing concerns.

Capital markets go in cycles, and never more so than in Latin America. The past decade has been typically turbulent, with equity capital markets switching from scorching hot to the deep freeze.

In 2010, ECM issuance across the region reached US$54.6bn, according to data from Thomson Reuters, a post-financial crisis record. Petrobras alone raised US$27.5bn in a follow-on that year, not including US$42.5bn that the Brazilian government invested in the oil company at the same time.

Volumes then faltered, with issuance in the next two years combined barely topping US$50bn. Last year was a genuine stinker, with ECM volumes tumbling to a 10-year low of US$18.4bn and IPOs dipping to US$3.1bn.

So what can we expect as we head further into 2015?

If history is anything to go by, this could be a solid if not spectacular year, for several reasons. First, ECM activity tends to be spasmodic in Latin America, with a few bad years preceding one good one. Last year’s horror show thus bodes well.

“We are set to see a bottoming out of major indices in the first half followed by a pick-up in stock prices and a rebound of issuance activity in the last six months of 2015”

The region entered 2014 facing “a lot of political uncertainty and overhang”, said Daniel Darahem, head of Latin America ECM at JP Morgan. “We had the Brazilian elections [in October 2014] and concerns over a broad regional slowdown. Commodity prices were weakening but it was hard to predict how sharp the sell-off in iron ore and copper would be, given the slowdown in China.”

Many of those uncertainties remain, notably the clouded outlook over China, which has effectively bankrolled the economic fortunes of commodity-rich countries for more than a decade, and sharply lower oil prices, which undermine prospects for regional energy producers.

But this year feels different, bankers said. Uncertainties are largely known and quantified. The US economy is in a state of healthy revival, with the Federal Reserve set to begin hiking interest rates in the second half of 2015.

Regional economic prospects also point to a revival in issuance, particularly in the Spanish-speaking reaches of the continent. Gross domestic product is tipped to expand by 3.6% in Colombia and by up to 3.5% in Mexico in 2015, according to the countries’ central banks.

Mariano Espada, head of Latin America ECM at UBS, said stronger GDP figures should generate a “solid” level of new issuance in the likes of Mexico, Colombia, Peru and Chile, with activity rising as the year wears on.

JP Morgan’s Darahem said: “We are set to see a bottoming out of major indices in the first half followed by a pick-up in stock prices and a rebound of issuance activity in the last six months of 2015.”

Another reason for optimism is an expected reversal in fund flows. Capital fled Latin America (and emerging markets in general) in 2014, as investors opted for taking slightly more modest returns with lower risk. But investors and bankers are hopeful that the worst is now over.

“I see flows reversing this year as international investors again focus their attention on the region,” said a leading ECM banker. “We are already seeing more high-quality international institutions looking ahead to opportunities in the secondary markets and on the issuance side as well.”

An orderly queue

Leading corporates are lining up to sell shares on regional bourses this year and next.

“We have a considerable amount of issuers ready and waiting for better market conditions so they can spring into action and tap the market,” said Guilherme Salem, Latin America head of ECM at Deutsche Bank.

“There is a good amount of issuance set to come out of Colombia, Chile, Brazil and Mexico as we move into the second half of the year. That includes offerings that were filed and postponed in recent years.”

Sharply lower energy and commodity prices will focus activity on a host of consumer-facing sectors, from logistics to banks to insurers and, in Brazil and Mexico, infrastructure specialists. Another sector to watch should be healthcare, especially in Brazil, which is home to 40% of the region’s hospitals and has recently passed a law to encourage more foreign investment in private clinics.

Deutsche’s Salem also points to a likely spike in issuance from airlines, with carriers benefiting from lower oil prices and higher load factors and passenger counts, the result of improved infrastructure and an expanding middle class.

A host of firms are also looking to sell shares in 2015 in Brazil, including cellphone tower operator T4U Holding, and logistics company Ouro Verde Locacao e Servicos. Other pending sales include the spin-off of Grupo Mexico’s railroad unit, an IPO set to raise around US$660m.

Home and away

Last year’s localised challenges have encouraged corporates to look beyond borders. Brazilian mining giant Vale is mulling a listing of its base metals division on the Toronto Stock Exchange, with a potential secondary listing in New York. That sale, which remains up in the air, would value the unit at up to US$35bn. Nor is Vale alone.

Deutsche’s Salem said: “You have other companies based in the region who are analysing a stock listing in the US, while others are looking to list in London or Canada, notably in sectors such as technology and telecoms.”

There are some causes for concern, particularly the outlook for Brazil. The nation typically comprises 60%–80% of LatAm ECM issuance but is a country struggling for momentum. Domestic equity capital issuance tumbled 65% year-on-year in 2014, while the Real hit a 10-year low against the US dollar in early February.

A recent survey of analysts carried out by the Central Bank of Brazil tipped GDP to shrink by 0.42 percentage points this year, the first annual contraction in economic output since 2009. Paulo Nepomuceno, chief economist at Coinvalores CCVM, describes the country’s outlook as “bleak”.

The Batista hangover is also proving hard to shift. Many leading institutions were burned by the collapse of Eike Batista’s once impregnable logistics-to-energy empire, and such memories die hard. According to Thomson Reuters data, foreign investors bought 69% of Brazilian IPOs between 2006 and 2012, before slumping to 38% in 2013.

Yet bankers and issuers remain optimistic, despite a series of IPO postponements in the first weeks of 2015, including that of food processor JBS Foods. JP Morgan’s Darahem said he expected to see “an acceleration in Brazilian issuance later in 2015 and into 2016, simply because of a low base”.

To Deutsche’s Salem, Brazil remains a large, vibrant market with big, healthy companies despite struggling with economic growth.

“It’s exactly the right time to look at increasing your exposure to the country. Stock values are set to rise in Brazil, thanks in particular to an increased weight in non-commodity related names in the Bovespa index, notably in the FIG and consumer spaces. There is cautious optimism that this will be a good year,” he said.

Then there’s Petrobras. The kickback scandal surrounding the energy group shows no sign of abating. It could suck in members of the country’s commercial and political elite, including members of president Dilma Rousseff’s ruling party.

But there is an upside, in that the ongoing investigation into Brazil’s most prominent and powerful corporate has forced the government to consider rule changes designed to make the nation more attractive to investors. (See separate story on Petrobras.)

“Ultimately, this issue could prove to be a force for good,” said one Brazil-based investment banker.

A final area of interest could be Argentina. An international economic and financial pariah in recent years, it is back on the radar of some investors, thanks to elections slated for October 2015, and the departure of president Cristina Fernandez de Kirchner.

“Investors are starting to position themselves on Argentina, and this will intensify throughout the year in our opinion,” said JP Morgan’s Darahem, while UBS’s Espada described the country as a “positive wildcard”, pointing to a rising level of interest from investors.

“While the near-term picture remains difficult, with presidential elections later this year, we see stronger growth in 2016 and a potential reopening of capital markets on the back of it,” he said.


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