Hopes rise of a break in Brazil’s IPO drought

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Brazil’s stock market is in the throes of its longest stretch without a new flotation for at least two decades. Could the drought in Latin America’s largest bourse be coming to an end?  

That at least is the talk among investment bankers and money managers on Avenida Faria Lima, the Brazilian version of Wall Street. 

With monetary easing under way at home and expected soon from other major central banks, they see conditions for a revival of initial public offerings in the region’s leading economy.

“There’s huge 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 anywhere between three and five IPOs in 2024.”

Even in the context of a global IPO slowdown, the dry spell on São Paulo’s B3 exchange stands out. Its last debut was in September 2021, putting an abrupt end to a bumper couple of years. 2021 was a high point for listings, with R$65bn raised across 45 transactions.

A key factor was the Brazilian central bank’s (BCB’s) early and aggressive approach to inflation, raising its benchmark lending rate from an all-time low of 2 per cent during the Covid-19 pandemic into the double digits. 

Higher borrowing costs then damped a structural shift from fixed income to equities by Brazilian savers. Political uncertainty during the 2022 presidential election also weighed on confidence. Now market predictions are for the base rate to fall below the psychological threshold of 10 per cent this year.

Perhaps a more critical variable for Brazil’s IPO restart is the timing and pace to the anticipated start of rate cuts by the US Federal Reserve, due to its outsize impact on global capital flows, according to market watchers.

Optimists see other reasons in favour. While Brazilian domestic institutions have pulled back from stocks, strong foreign inflows towards the end of last year helped the local Bovespa index touch an all-time high. Brazilian equities were in the top third of emerging markets in 2023 with a 34 per cent return, versus 10 per cent for the broader FTSE Emerging All Cap index, according to LSEG data.

Even so, analysts say the South American nation’s stocks remain relatively cheap. Excluding oil major Petrobras and miner Vale, Brazilian equities are trading on a 12-month forward price-to-earnings multiple of 10 times, below the historical average of 12.3 times, according to BTG Pactual.

Most EM funds are overweight Brazil and positions have increased over the past year, says Pablo Riveroll, head of LatAm equities at Schroders. “Money from local investors is likely to move back into equities as rates fall, probably accelerating once in single digits,” he adds. “The market expects that to happen towards the middle of the year so it is probably then that IPO activity accelerates.”

However, investors will be mindful of the poor performance of recent floats. Only 14 of the 69 from 2020 and 2021 still trading are in positive territory, according to Nord Research. There also remain fiscal concerns, given government pledges of extra spending. The BCB has said orderly public accounts are vital for it to continue reducing rates. 

Eduardo Figueiredo, head of Brazilian equities at Abrdn, sees potential for IPOs in under-represented sectors such as agriculture, technology, healthcare or infrastructure. He believes investors will be more picky, preferring businesses that are already profitable and generating cash. “Discipline will be higher this time round as capital is more expensive globally,” he says.

Buyers will want larger issuances to ensure liquidity of shares post-IPO, adds Rafael Oliveira, fund manager at São Paulo-based Kinea. “This was a significant challenge in many offerings in the 2020-21 cycle.”

Itaú BBA estimates between R$50-R$70bn in proceeds from IPOs and other equity issues in Brazil this year, with between 25 and 35 transactions. Among the contenders to go public is subsea oil and gas services provider Oceânica Engenharia, which recently notified its intention to float. Follow-on deals in the coming weeks will test market sentiment. 

Yet with the Bovespa down so far in 2024, net foreign outflows from B3 in January and the Brazilian real slightly lower against the dollar, those on Faria Lima are not getting carried away just yet.  

“We think the second half of the year will be busier for IPOs,” says Marcello Lo Re, head of Latin America equity capital markets at Morgan Stanley. “It will be closer to the historical average, excluding 2020 and 2021, which were outliers.”

michael.pooler@ft.com