Latin Finance - March/April 2010 - 50

Brazil equity opportunities 2008 is that demand for small and mid-caps cannot be sustained by hedge funds and short-term investors,” says Pedro Bastos, CEO at HSBC Asset Management in São Paulo, which manages $62 billion reais in and on and o shore assets. When the crisis hit, funds tracking interest rate benchmarks had to sell down, he says. In January, investors pushed back against pricing on deals such as food maker M. Dias Branco, which pulled its follow-on in volatile market conditions. Aliansce Shopping Centers meanwhile raised less money in its IPO than anticipated. Still, most are relatively sanguine about elections. Will Landers, managing director and senior portfolio manager for BlackRock’s LatAm equity funds, with $8.5 billion in assets in Latin portfolios, predicts the impact on markets in the long-term will be minimal. That said, he sees some short-term volatility: “It is naive to think they won’t have an impact. There will be lots of noise as candidates seek to di erentiate themselves,” he notes. Companies are unlikely to want to take the risk of a second half o ering if they can avoid it, investment bankers concur. “There will be a lot more activity in the ﬁrst half as companies bulk up Multiple Constrictions balance sheets in debt and equity followed by a much quieter There are serious questions too over valuations after a 148% second half with a rush to complete deals by June or July,” equity market rise in dollar terms in 2009 and a wall of investor says Aguzin. money that has driven up prices, particularly for retail issuers. Leite says most transactions will be “Room for capital gains are smaller than launched by July 28-29, the last date they were in the past,” admits Roberto when market rules allow companies to Serwaczak, managing director of Citi execute deals on the back of ﬁrst quarter Global Markets Brasil in São Paulo. ﬁnancials. Some investors are more sanguine “We should see more activity in the than others. Bastos is comfortable with ﬁrst half not only thanks to elections February levels as he sees earnings and higher rates in Brazil but because expanding a generous 28% this year. He companies are trying to anticipate admits that trailing multiples seem high, investments for this year’s robust 5%-6% with stocks at a P/E of 16.9x on 2009 growth,” adds Fernando Iunes, managing earnings against an average of 10.7x. director and head of equity capital markets But Bastos notes that 2010 anticipated at Itaú BBA in São Paulo. P/Es drop to 14.6x, which is justiﬁable Given the delicate situation facing in a period of economic recovery when Brazil in the second half and a volatile earnings multiples tend to expand. global scenario, the consensus for the “History does not reﬂect what this country number of deals is higher than last year, is about to experience in terms of growth but not close to the bumper harvest of and formation of the middle class,” he 2007. Last year, there was some $25 says. Less room for gains, says Citi’s Serwaczak billion in issuance and the ﬁrst half of Other investors agree higher P/Es may this year can potentially surpass that be justiﬁable thanks to earnings growth, volume, reckons Daniel Wainstein, co-head of investment but they are starting to look at opportunity elsewhere in LatAm, banking for Goldman Sachs in Brazil. with a beaten-up Mexico starting to look attractive. The equity deals brought to market are unlikely to be what Nicholas Morse, LatAm fund manager at Schroders Asset investors ideally want. Investors want pure retail stories, of the Management in London, fears the best of the rally may be over ilk of Natura or Lojas Renner, but these are likely to be scarce. and has trimmed his position to slightly overweight in Brazil to the beneﬁt of Mexico. “Brazil is looking less attractive than it was. “These companies are cash cows that don’t have the same capex The risk-return beneﬁts have shifted,” he notes. Schroders global needs that commodities companies have, and don’t see any need to come to market,” says Aguzin. Many investors are turning to emerging markets team in London runs $8.5 billion in assets. banks as a proxy for the consumer story, he notes. Gorra agrees that the market has been a little too zealous on Instead, what should prove popular is a large number of real pricing, especially with retail names, adding that they are not estate companies. Then there are infrastructure stories related to pricing in the possible impact of higher rates. “We took proﬁts o the long-term upgrade of Brazil’s ports, airports, roads and public the table recently, even though we think these names are still a transport as well as oil and gas supply companies. long-term buy,” he notes. Rates are likely to trend up, with one year futures in late Petrobras Elephant January at 10.41%, 165 basis points higher than February’s Two jumbo deals will stand out in the year. The ﬁrst is a capital 8.75% Selic rate. In addition to the likely drag of higher rates, elections are likely to increase volatility in the second half, market raising exercise by Petrobras to help underwrite its ﬁve-year $175 billion investment plan, which will be placed after a deal by the watchers agree. Bankers predict that companies will have just a government to purchase ﬁve billion barrels of reserves at a price few months to raise ﬁnancing before these two factors dampen which has yet to be determined, with one banker estimating a investor spirits. Rush to Complete 50 LATINFINANCE March/April 2010

Latin Finance - March/April 2010

Table of Contents for the Digital Edition of Latin Finance - March/April 2010