A raging pandemic and a 5% economic contraction may seem like a bad backdrop for an initial public offering. But Brazil’s IPO market defies macro gravity with the hottest year since 2007.
Seventeen companies went public at the end of September. For the patient stock picker, it could offer ground floor entry to a rising innovative star. “Brazil has a very strong and growing new economy,” said Pablo Riveroll, head of Latin American equities at
“We are focused on companies that will benefit from the new normal.”
A middle-income country of 210 million, Brazil has become sleeping giant digital revolution. E-commerce accounted for 3% of retail sales last year, compared with 21% in China, noted Malcolm Dorson, Latin America portfolio manager at Mirae Asset Global Investments. Covid-19 woke him up.
“We have a company whose digital sales have gone up from 5% to 25% in a few months,” said Piero Minardi, Latin American investment chief for private equity powerhouse Warburg Pincus.
Two Warburg investments went on sale in the last month:
Pet Center Comercio e Participacoes
(ticker: PETZ3.Brazil), which combines a pet shop and a veterinary clinic, and
Sequoia Logistics Solutions
(SEQL3.Brazil), a file
/ USPS for emerging e-tailers in Brazil. Riveroll of Schroders also watched
Locaweb Internet Service
(LWSA3.Brazil), GoDaddy’s analogue for small businesses that need web hosting when they are busy online, while Dorson marks
(VSTA), a provider of educational content for K-12 schools.
“This is a business with a very visible, and highly scalable, revenue path,” said Dorson. Well-established chain stores like
(VVAR3.Brazil) has come up with advanced equity offerings to fund online expansion.
These problems prompted a surge of capital from local investors who were pushed into equities due to falling returns on traditional savings. Selic’s benchmark interest rate in Brazil has fallen from 6.5% to 2% over the past 16 months as inflation hit a record low. The consequent fixed income exodus has pushed stocks up by half, in local currencies, from their March lows.
But the same dynamics deter global investors. The fall in interest rates has ended Brazil’s carry trade (borrowing the low-interest currency to buy the high-interest currency), pushing out capital and sending the Brazilian real relentlessly downward. Dollar price
iShares MSCI Brazil
Exchange-traded funds (EWZ) are down 40% for the year, although there have been dead spikes.
Trade-weighted real figures are now at 10-year lows, according to Riveroll, but Brazil’s political turmoil limited the rebound. The government needs to pull back on Covid-driven transfers to avoid dire levels of debt. That’s hard to believe, with mercurial president Jair Bolsonaro and several parties competing in parliament. “It’s a soap opera,” said Mirae’s Dorson. “We see him every morning, but don’t spend too much time on the weeds.”
Brazil’s local residents are showing signs of IPO exhaustion, as a lot of trash is among the gold nuggets, said Richard Thies, emerging market portfolio manager at Driehaus Capital Management. Developers, in particular, have flooded into exchanges to take advantage of the lowest mortgage costs. “Everyone and their mothers in real estate seem to come to the market,” he said. “I think the momentum mania phase is over.”
That doesn’t mean the treasure isn’t there, it’s just that finding it requires digging. “There is a very big chance of penetration if you choose the right horse in Brazil,” said Dorson. “But it has to be a long term story.”