Latin American equity issuance likely will slow in the first quarter of 2022 as concerns of rising global inflation and interest rates – and local political uncertainty – keep at least some companies on the sidelines, analysts say.
That can be seen in Brazil, where general elections will be held in October.
“We’re going to see several transactions trying to tap the markets, but not as many as we saw in the first half of 2021,” says Bruno Saraiva, head of equity capital markets at Bank of America Merrill Lynch in São Paulo. “The long term interest rates in Brazil are above 11 percent, inflation is not exactly under control yet and we’re getting closer to the presidential election.”
Equity issuance had risen in the first half of 2021 in Brazil and across Latin America as companies took advantage of an economic recovery from the COVID-19 pandemic to tap the market with initial public offerings (IPOs) and follow-on deals. The market, however, began to slow at the end of the third quarter and during the fourth quarter as stock prices extended a decline that began at the end of June. The S&P Latin America BMI fell more than 25% through December 14, 2021.
This came as a surprise to Saravia.
“We had the perfect combination of low interest rates, low inflation, low interest rates, better-than-expected GDP and a better-than-expected leverage ratio for the country,” says Saraiva. “We had expectations that we were going to approve important reforms in Brazil. This made for a big inflow into equities in Brazil, and local and international investors were excited to put new money to work in new issues.”
That’s changed with the rise in global inflation and interest rates, says Scott Piper, head of Latin American equities at Itaú Asset Management.
“Locals are now selling equities and the money is flowing back into fixed income as rates are rising,” he says. “The market conditions have deteriorated and many initial public offerings that came out in 2021 are now down from their original price.” LF