Interview with Facundo Vázquez
Head of Latin America ECM at Goldman Sachs

Issuance of Brazilian equities, whether via initial public offerings (IPO) or follow-on issuance, will likely reach a record high in the second quarter of 2021. Add in the likelihood of Mexican companies coming back to the equity markets with some sizeable issuances, the year is shaping up as one where companies are retooling and rebuilding for expansion, said Facundo Vázquez, head of Latin American equity capital markets at Goldman Sachs.

The year had already opened with record volumes out of Brazil, where there were 13 IPOs totaling BRL19.2 billion ($3.4 billion) in the first two months, according to Brazil’s securities commission.

“We haven’t seen a level of activity like this one in the region before,” Vázquez said. “We’ve had to put together all the resources that we have at the firm —Latin American, US, and global resources— to handle this level of activity.”

Image: Facundo Vázquez

Volumes in the coming weeks and into the second quarter are expected to be even higher.

“What we are going to see in the capital markets in Brazil in the next quarter is going to be a record on a historical basis,” Vázquez said. “We are going to see follow-ons from publicly traded companies, but the phenomenon that we’re seeing in Brazil is on the back of a strong IPO backlog and pipeline.”

On March 1, a total of 42 IPOs were registered and waiting to be issued on the Brazilian Stock Exchange, according to Brazil’s securities commission. Six companies registered IPOs in the last two working days of February and 20 companies have been waiting since 2020.

The pipeline is largely composed of companies from the technology, health, cyclical, and consumer discretionary sectors, Vázquez said.

“We’re going to see a very strong pipeline in broader tech, fintech, e-commerce, enablement, software companies, companies exposed to digitalization,” he said. “The health sector is going to be very active, following a worldwide trend and consumer discretionary will perform well on the back of GDP growth from a very low base, higher disposable income and a stronger labor market.”

One of the drivers of the record levels in Brazilian equity-offerings is a rise in commodity prices.

“We believe we are at the beginning of a bull market in commodity prices,” Vázquez said.

He expects to see cyclical names benefiting such as those related to soft commodities, agribusiness, and the capital goods sector related to infrastructure logistics. These are companies whose costs are in local currencies but whose products sell in dollars. They benefit from the low interest rate environment while also getting a boost from commodity price recovery.

“When you think about Brazil, hard and soft commodities are extremely relevant. The bull in the commodity cycles is impacting the overall performance of all of the Sao Paulo Stock Exchange (Bovespa), and I think it has a very important implication on the net flows or dollar flows into the country, which effectively provides a cushion or floor to the BRL.”

Other drivers of the record issuance are expectations of stable interest rates and currency appreciation, Vázquez said.

“There is a positive correlation between FX appreciation and equity issuance, and we have very bullish views on Latin American currencies despite some recent volatility,” Vázquez said.

Global growth in earnings per share fueled by loose global monetary and fiscal policy has also been a driving force in this surge in the Brazilian equity market, Vázquez said.

“The unprecedented equity volumes and equity performance have been mostly in developed markets, but we are seeing and expecting a switch from developed markets to emerging markets,” Vázquez said. “Houses, broker-dealers, and banks are bullish on emerging market equities because of the commodities bull and the potential appreciation of the currencies. We’re going to see spillover from developed markets into emerging markets in the next twelve months because there’s still value in emerging markets.”

In this context, investors are looking to switch from growth stock into cyclical and value stock, and in doing so, they are turning to Mexico whose macroeconomic and fiscal situation is very good compared to other countries in the region, Vázquez said.

“At the right price, this switch from extreme growth to deep value is benefitting Mexico in the short term. That’s where Mexico starts to be in the game again,” he said. “Based on my discussion with investors, they are redeploying capital back into Mexico. The Mexican peso is one of the best-performing currencies in the region and they’re seeing that there’s no macro or fiscal risk in the short and medium-term.”

As capital flows into Mexico, new equity issuances are likely to come, Vázquez said

“We’re starting to see and to hear and to pitch equity deals out of Mexico,” he said, noting that there haven’t been any sizeable equity issuances in Mexico for the last couple of years. “Mexican companies with solid business plans and strong capital structure need to keep on investing, to keep on growing, and they are now seeing an opportunity.”

“It will not be a massive amount of equity, but it’s the beginning of a potential reopening of the Mexican capital market in 2021,” he said.