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Brazil
in a better shape than other emerging markets
Right now it is
hard to walk around swanky parts of São Paulo without running into
someone who has an uncle, a cousin or a brother involved in a company
float. As many as 27 firms made their debut on the São Paulo exchange,
known as Bovespa, in the first half of the year, surpassing the total
number of floats in the whole of 2006. And they keep coming.
IPO-fever is such that
shares in the exchange itself were due to start trading on October 26th,
as The Economist went to press. It should be a coming-of-age party for a
market that has broadened, deepened and bounded ahead recently (see
chart).
This is quite a
turnaround. Five years ago interest rates were so high that investing in
equities was an esoteric pastime. Trading volumes were languishing and
companies were rushing to delist.
Since then, three things
have happened. First, interest rates have come down. Second, steps have
been taken to improve corporate governance. And third, Brazil's public
finances have been tidied up by a combination of good housekeeping and the
commodities boom. Even Warren Buffett, a shrewd American investor, has
been buying the Brazilian currency.
The flirtation with
equities is still in its infancy. Years of high interest rates have given
Brazil a fixed-income culture, says Eduardo Mufarej of Tarpon Investment
Group. Only a tiny proportion of Brazilians own shares. As interest rates
continue to head down, Brazilian pension funds should increase their
exposure to equities, which now lies at just 16 per cent, excluding those
of state-owned Banco de Brasil. Itaú, a Brazilian bank, reckons this will
add up to an annual flow to the Bovespa worth between 18.5 and 24.5
billion reais ($10.2 billion and $13.6 billion) until 2010, which is more
than foreign investors have put into the market during the past decade.
The same forces that
have benefited equities have brought all sorts of snazzy new debt products
to Brazil in the past couple of years. Mortgage and credit-card debts,
which did not exist when interest rates hovered somewhere above the
Corcovado mountain, are now being bundled together into securities and
sold. The adventurous are even getting excited about more exotic products,
such as precatórios, which bundle local-government debts.
How sustainable is all
this? On the one hand, the IPO activity has been good for corporate
governance. In order to attract interest, the recent IPOs have had to sign
up to so-called novo mercado guidelines, which do away with the dual share
classes, over-friendly board members and non-existent protection for
minority shareholders that made life hazardous for outside investors. A
further boost to confidence should come when Brazil's sovereign debt is
upgraded to investment grade, which most people expect will happen within
the next 18 months.
Familiar dangers lurk,
though. Lots of good companies have taken advantage of favourable
conditions to come to the market, but some pretty dreadful ones have too,
according to Paulo Bilyk of Rio Bravo Investments. Brazil is more open
than many other emerging markets and so more vulnerable to hot money. Some
70 per cent of the money for the IPOs has come from foreign investors.
That money would probably be the first to head for the exits in any
wobble. And some of the new stocks are illiquid. Still, for the moment
things are looking good. If you don't believe us, say São Paulo's
financiers, ask Mr Buffett.
www.economist.com
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