The decision by Isolux Infrastructure, the Brazilian unit of a Spanish infrastructure company, to cancel a planned IPO has highlighted a wariness of primary equity markets among investors.
The company squarely blamed market conditions for its decision on Thursday. “Given the lack of market visibility for the offering in the short term, the company decided to wait for a better opportunity to go to markets,” it said in a statement.
The latest setback takes the number of recently-pulled deals to four. Bankers and investors say two key concerns are dampening spirits in the short-term.
One is Brazil’s unpredictable imposition of macroprudential measures. The Central Bank has extended the 6% IOF tax on bonds twice this year, lengthening it to capture issuance of up to five years from two. Many fear that further measures, including ones that hurt equities, could be in the pipeline.
“This measure is being widely discussed by the investor community. Foreigners fear that restrictions on equity investments could be re-introduced,” said Allan Hadid, CEO at Brazilian investment firm BRZ Investments. “It’s less the tax itself than what steps may be taken next and the lack of signaling to markets that is of concern.”
Despite the concern, a return of risk appetite after a rocky fourth quarter and growing optimism about the direction of the economy means that in the mid-term bankers continue to predict a deluge of deals after a long drought in IPO issuance with the most recent deal taking place in July last year.
Bankers point out that the benchmark Bovespa stock market index is up 19% this year and Goldman Sachs predicts a further rise to 72,000 by year-end. The index closed at 67,749 on Thursday.
“People want to put their money back to work. It’s a phenomenon that’s taking place across the M&A and IPO markets,” said Leite. Already, a pipeline of seven deals, five IPOs and two follow-ons is registered with the stock market regulator, and Leite predicts the average deal size will come in at around $300 million.
“We’re pretty confident from dialogues with clients that these deals are going to be able to price,” he said. If he’s proved right, a host of other companies should follow suit. The Brazilian market is not over-valued, he believes, with stocks trading at a historical five year average of 11 times forward earnings.
There is improved risk perception with volatility starting to recede, said Fernando Iunes, MD, head of equity capital markets at Itaú BBA.
The improving environment is reflected in flows back towards emerging markets and Latin America, he said. “Markets will continue to improve and growth will come back. We are expecting a better 2012,” Iunes said. Capital flow to Latin America has returned and growth prospects in the region are steadily improving, he added.
While most deals will come from Brazil, other countries are also well positioned. Latin currencies are likely to appreciate as GDP forecasts are revised up around the region
Last week, Peru revised its GDP predictions upwards to 5.7% from 5.4%. Colombia, Mexico and Chile have also increased growth forecasts recently. “You’ll see a reasonable amount of activity out of Mexico in consumer, retail and financial while Colombia and Chile will also be active, including via privatizations,” Leite said.