Investment in Latin America is too often seen as a narrow play on a handful of commodities, companies and banks. In reality, these markets are increasingly diverse. More importantly, a rich seam of new issues is creating more opportunities all the time. The buoyancy of the Brazilian IPO market is perhaps the best example.
2020 was a bumper year for Brazilian IPOs. 28 companies listed on the main exchange, raising BRL$43.7bn (US$8.3bn) in spite of the pandemic. This was almost four times the previous year’s figure and the highest level since the giddy pre-crash optimism of 2007.
This year looks set to be even more promising. Over 40 companies have already said they want to list on Sao Paulo’s B3 exchange this year. There are sound reasons for this robust pipeline, with excess global liquidity, favourable macroeconomic conditions, a decline in interest rates and increased financial awareness among Brazilian investors all supporting new issuance in Brazil.
Vast stimulus packages have been put in place to support economies in the wake of the pandemic. Central banks across the world have implemented loose monetary policy measures, pushing interest rates to historic lows. Until relatively recently, most Latin American countries had double-digit short-term rates, but have moved to a lower rate regime over the last decade. By 2019, the prevailing interest rate for most countries ranged from 2.5% to 5.5% per annum, according to the World Bank.
In Brazil, this has made a profound difference to the business environment. It has accelerated the transformation of Brazilian capital markets, which are now able to provide more effective financing for consumer spending and firms’ operations. The lower cost of capital and higher asset prices have created a more fertile environment for new issuance in the Brazilian equity market.
Changing asset allocation
The shift in rates has also prompted a broad portfolio reallocation by individuals, institutional investors and family offices, away from traditional fixed income instruments and into new investment options. Savings accounts were the preferred investment product for the average Brazilian as they used to offer reasonable risk-free yields, guaranteed by the Brazilian federal government, as well as being widely available for a population with limited financial education. However, the sharp decline in interest rates has meant bonds no longer generate attractive returns, forcing investors to look elsewhere.
The middle and upper classes in Brazil have sought to learn about investments and try more sophisticated products such as wealth management. This has generated a wholesale move out of deposit accounts and into the stock market in search of higher returns. The number of retail investors on the B3 stock exchange almost doubled to 3.2m in 2020. This shift in asset allocation has happened alongside growth in the local asset management industry, which has supported demand for IPOs.
Through low rates and fiscal stimulus, governments and central banks have created significant liquidity in the global financial system. Brazilian stock markets have benefited, seeing strong inflows of foreign capital since the start of the year. A weaker Real has also encouraged foreign investors into Brazilian markets.
What does a strong IPO pipeline mean for investors?
We believe a buoyant IPO market is encouraging. It diversifies the Brazilian market, bringing in new sectors for investments and ensuring that Brazilian financial markets truly reflect the vibrancy of the economy. This includes areas such as technology and financial services, which are growing quickly in the region. In turn, a broader and more diverse market brings new investor interest, which should support the market in future.
The Brazilian IPO market shows how Latin American markets are growing and maturing, bringing more opportunities to investors. As active managers, this is welcome, allowing us to shape the portfolio to different market environments and get access to new and exciting sectors.