Brazilian IPOs: Hot, hot, hot
Deal activity is heating up but investors could get burned, analysts caution.
NEW YORK (CNNMoney.com) - Brazilian IPOs are on fire this year, but some analysts warn the market may be too hot to handle.
While IPOs in Russia and China have been making headlines with their multi-billion deal values, activity has been heating up in other emerging markets like Brazil, where deals are on track to outpace last year's numbers.
"Already in terms of the volume of deals, Latin American IPOs are probably well on their way to one of their strongest years on record," and Brazil has consistently led the region since 2001, said Richard Peterson, a senior researcher at Thomson Financial.
The global economic recovery has helped improve the environment for public listings worldwide, with emerging market activity expected to post energetic growth this year, according to a report on Global IPO Trends published by Ernst & Young.
Much of Latin America's growth can be traced to the energy boom, but Brazilian listings this year have extended well beyond the oil patch. Real estate and property firms, as well as technology and telecom companies have made their market debut.
But Brazil's real strength lies in basic materials, such as metals, said Bruce Zaro, chief technical strategist with Delta Global Advisors, an investment advisory firm. "Basic resource markets have been moving in sympathy to oil, and when basic material prices are hot, there's a rush to raise money," he said.
But some analysts say it may be hard to find a bargain as investors have crowded the market looking for a piece of the action.
"It was a bargain two years ago, but there's been a big run up in all Brazilian assets," said Brad Setser, director of research at Roubini Global Economics Monitor.
Just consider the Bovespa, the benchmark index of the Sao Paulo Stock Exchange which is made up some of the Brazilian market's largest and most heavily traded issues. It broke through 41,000 for the first time Tuesday, setting an all-time high, and has increased more than two-fold in the last year.
Still, investors are seeing some ample returns. Real estate company Gafisa, which went public in February, rallied 37 percent on its first day of trading in Sao Paulo.
None of the companies debuting this year have listed on U.S. exchanges, so investors need to consider the risks associated with buying foreign stocks, including currency fluctuations and geopolitical instability, analysts cautioned.
Brazil also poses additional uncertainty. For one, its economy is tied to the run up in commodity prices worldwide. Oil prices have soared a whopping 44 percent in the last year, but a downturn in prices could have a significant impact on the country's resource industries.
Furthermore, while economic growth in Brazil has been steady, it isn't exactly robust. According to World Bank projections, gross domestic product is expected to grow just 3.5 percent this year - the slowest rate of expansion among emerging market and developing countries.
According to Thomson Financial's Peterson, there's always an inherent risk in emerging markets. "But as operations evolve to embrace market reforms and as investment banks penetrate those sectors, those risks are mitigated," he said.
Those risks, however, were highlighted earlier this week when Bolivia nationalized its natural gas industry, echoing moves made by Venezuela to exert control over its rich oil industry.
Free-market advocates bristled at the moves, but Zaro of Delta Global Advisors said the uncertainty could carve out an opportunity for investors.
"The recent trend of nationalization of resources is going to create quite a bit of nervousness for investors in these markets and could be the catalyst that brings Latin American markets down to where you have better entry points," he said.
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