Tuesday, January 18

Record wave of emerging markets IPO meets risk-wary investors

A record number of emerging market companies made their public debut in 2021, just ahead of what should be a difficult year for equity investors.

While the price of most newly issued stocks has risen since their IPOs, the benchmark for developing economy stocks just ended its worst year since 2018, suggesting that the appetite for risky assets is declining, with rapidly spreading virus variants and more. interest rates set to further challenge equities in the coming months.

Those headwinds were far from investors’ minds, as increased capital needs and hopes for a global economic recovery prompted 1,161 emerging market companies to make initial public offerings last year in local or foreign currencies. In total, they raised $ 228 billion through listings, a 31% increase from 2020, according to data compiled by Bloomberg.

“Last year, especially in the first half, we saw a boom in technology-related IPOs in emerging markets,” said Ignacio Arnau, a Madrid-based investor at Bestinver Asset Management, which manages about $ 8 billion. . “There were both fundamental and scarcity value factors that were driving appetite in the market.”

The flood of new listings may have sated some of the market demand, especially in the tech sector, said Arnau, who sees fewer small businesses making the cut this year, regardless of quality.

“There are a lot of high-quality companies with proven concepts, profitable business models and excellent track records that trade at very cheap valuations,” he said.

In 2021, China led developing economy IPOs with 602 new deals, followed by South Korea, India, Indonesia and Brazil, according to data compiled by Bloomberg. Of those whose prices were tracked by Bloomberg, the majority fell within the expected range.

Since those shares began trading, share prices have risen by a size-weighted average of 30%, the data shows.

That breaks down into earnings of 37% for emerging Asian companies and 27% for those in the Middle East and Africa. Meanwhile, emerging European and Latin American stocks listed in 2021 lost 14% and 13% from price, respectively.

Diversity in performance may have to do with regional recovery trends, as well as the types of companies that went public and performed better last year.

Recently traded Asian consumer, industrial and tech stocks are among those that rose, on a weighted-average basis, as were many of the Middle East and African publicly traded companies in the energy and utilities spaces. . Losses in communications industry prices hit emerging Europe, while Latin American markets were largely dragged down by political risk and the continuing fallout from the pandemic.

Heading into 2022, Beijing’s regulatory crackdown and new rules for China’s first-time foreign share sales may drag the momentum from IPOs. India’s capital market regulator has also tightened the rules just as a flood of new-age consumer technology-based companies, some of which are not yet profitable, take advantage of the equity markets.

Still, the world’s second-largest battery maker in Seoul and an Indian insurer with more than 1.2 million agents are among the deals dealers will be ready for this year. Dubai also plans to include a number of companies in a bid to attract investors and echo the success of the Abu Dhabi and Riyadh markets, which benefited from the IPO boom last year.

In Brazil, meanwhile, investment bankers expect deals to slow down as interest rates rise and the country faces a divisive presidential election. Some say there could be as few as 10 Brazilian IPOs this year, up from 50 in 2021.

Among investors assessing the appetite for emerging market stocks in 2022, BlackRock Inc. has taken a neutral stance, preferring stocks from the developed world. Others, from Goldman Sachs Group Inc. to Morgan Stanley to JPMorgan Chase & Co., forecast persistent weakness through at least the second half.

“It’s hard to see that emerging markets as a whole will do well given that China is the 800-pound gorilla in the benchmark,” said Lu Yu, portfolio manager at Allianz Global Investors in San Diego.

China accounts for about 30% of MSCI Inc.’s benchmark index of emerging market equities, and the Asian nation’s equities fell nearly a quarter in 2021.

In the coming week, traders and strategists will look to purchasing managers’ indices for signs of economic strength as nations such as China, India, Mexico and Brazil release data.

Here are some of the main economic data releases to watch out for over the next week:

  • Traders will closely follow Turkey’s inflation reading in December after recent moves in the lira.
  • Poland’s central bank will announce its base rate on Tuesday; the monetary authority has risen for the last three consecutive meetings
  • Purchasing manager indices in emerging markets, including China, India, Mexico and Brazil, will show the extent to which economies are still recovering from the pandemic amid new strains of the virus.
  • Chile will release economic activity data for November on Monday, offering traders a look at how the country’s recovery fared amid elections for a new president.
  • The Central Bank of Peru will announce its key rate on Thursday. You have increased the rate by 50 basis points in each of the last four meetings and by 25 basis points before.

© 2022 Bloomberg LP


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