For the first time in at least a decade, emerging markets are attracting more money from share offerings than industrialized nations as companies from Brazil to China complete record sales.
Companies from Petroleo Brasileiro SA to Agricultural Bank of China Ltd in the MSCI Emerging Markets Index’s 21 countries, raised $138 billion through initial public offerings (IPOs) and additional sales this quarter, beating the $62 billion raised by industrialized countries, data compiled by Bloomberg show.
Mark Mobius, who oversees about $34 billion as the executive chairman of Templeton Asset Management Ltd, says that last week’s record offering from Brazil’s Petrobras signals emerging market share sales may be approaching a “bubble.” For bulls from Huntington Asset Advisors to Thornburg Investment Management, faster profit growth and economies that are forecast to expand twice as much as industrialized nations, mean that stocks in developing countries are still a buy.
“The emerging markets are going to be the best place to be,” said Paul Attwood, who helps oversee $13.3 billion at Huntington in Cincinnati.
“Although emerging markets are starting to get to a point where the valuations are not as attractive, the growth is going to be there. That plays into healthy IPO markets.”
2007 Peak
This quarter, equity sales in developing nations exceeded the previous high of $72 billion in the last three months of 2007, data compiled by Bloomberg show. Beijing-based PetroChina Co, the country’s largest oil company, completed the largest offering of that quarter on the day MSCI’s emerging market gauge peaked, raising $8.9 billion in Shanghai on October 29, 2007.
The MSCI Emerging Markets Index traded at 18 times the earnings of its companies as PetroChina sold its shares, the highest level in five years, data compiled by Bloomberg show. The next day the gauge began a 12-month, 66 per cent plunge as a freeze in credit markets spurred the worst financial crisis since the Great Depression.
For Templeton’s Mobius, the ability of Petrobras to raise as much as $70 billion last week to develop offshore fields signaled that emerging market stocks may again be approaching levels of excessive valuations. Brazil’s state-controlled oil producer sold 2.4 billion common shares for 29.65 reais each and 1.87 billion preferred shares at 26.30 reais apiece on September 23 in the world’s biggest equity sale on record.
‘Very Careful’
As part of the sale, the Rio de Janeiro-based company issued about $42.5 billion of stock to Brazil’s government in exchange for the rights to develop 5 billion barrels of oil reserves. A day after the offering, Mobius said that the deal was an “abomination” that treated minority shareholders unfairly and showed “we may be entering an IPO bubble.”
“That is a signal,” Mobius said in an interview with Bloomberg HT television yesterday in Istanbul. “We have to be very careful.” According to him, valuations for Petrobras haven’t reached excessive levels yet. At the time of the sale, the oil producer traded at 7.5 times profit, almost half the ratio of 14.6 for the 113 companies in the MSCI World Energy Index, according to data compiled by Bloomberg.
The MSCI Emerging Markets Index was valued at 14.6 times earnings as Petrobras completed its offering, 19 per cent cheaper than when PetroChina sold shares three years earlier, data compiled by Bloomberg show.
Record IPO Gap
IPOs in emerging economies raised $42.3 billion this quarter, exceeding initial sales in the developed world by a record $31.4 billion, data compiled by Bloomberg show. Chinese companies accounted for the three largest sales.
Agricultural Bank of China, the country’s biggest lender by customers, raised $22.1 billion in Shanghai and Hong Kong this quarter to surpass Industrial & Commercial Bank of China Ltd’s $21.9 billion deal in 2006 as the world’s largest IPO. Both companies are based in Beijing. China Everbright Bank Co of Beijing sold $3.2 billion in shares. Zhejiang, China-based Ningbo Port Co, operator of the world’s second-busiest harbor, raised $1.1 billion on September 15.
China’s IPO market is “the big story of the year,” said Josef Schuster, the Chicago-based founder of IPOX Capital Management LLC, which oversees $3 billion. “There’s kind of a feeding frenzy there.”
Earnings estimates
Earnings for the 915 companies in China’s Shanghai Composite Index will climb 20 per cent next year, while profits for the 68 companies in Brazil’s Bovespa index will rise 29 per cent, Bloomberg data show. That compares with 15 per cent for the MSCI World Index of 24 developed countries and 14 per cent for US companies in the Standard & Poor’s 500 Index.
Economies in emerging markets will grow 6.5 per cent in 2011, according to estimates from the Washington-based International Monetary Fund. That compares with 2.4 per cent for developed nations and 2.6 per cent forecast for the US IPOs on the New York Stock Exchange and the Nasdaq Stock Market have raised $20.4 billion in 2010, while companies have filed with the Securities and Exchange Commission to sell about $50 billion in shares, according to data compiled by Bloomberg. That’s the widest gap since at least 1999, the data show.
General Motors Co will seek to raise $8 billion to $10 billion in a November IPO, less than the $16 billion the Detroit-based automaker originally targeted, two people familiar with the matter said last week. The earlier figure would have made GM’s sale the second-largest initial offering ever in the US, data compiled by Bloomberg show.
‘More Excited’
AIA Group Ltd, the main Asia unit of bailed-out New York- based insurer American International Group Inc, got preliminary approval last week for an October IPO that may raise about $15 billion, two people with knowledge of the matter said.
“Investors in general are relatively pessimistic about the prospects for the US and they’re sort of forecasting a long, slow recovery,” said Timothy Cunningham, a fund manager at Santa Fe, New Mexico-based Thornburg Investment Management, which had $56 billion in assets as of June 30. “When I think about the recent deals and the deals we’re looking at, I think we’re more excited about some of the international ones than we are about some of the domestic ones.”
