The third time was the charm for Azul. Following failed
attempts in 2014 and 2015, the Brazilian airline listed in
April, raising more than $571 million in an initial public
offering on the New York Stock Exchange.
"This was the moment when the conditions were right for an
IPO," Wade Angus, a partner at the law firm Jones Day, says of
Azul’s listing. "It had been in the works for a
long time and, finally, there was a window of opportunity."
Conditions had indeed ripened. Fund flows into Brazilian
equities reached $1.31 billion in the first four months of the
year, a turnaround from outflows of $3.3 billion in the same
period in 2016, according to data from the Institute of
Brazil’s equity market had been stuck in a jam
for nearly three years, but the impeachment of former President
Dilma Rousseff in August 2016 was viewed as a new dawn.
President Michel Temer came to office promising economic
reforms that would reignite the economy and create more
investment opportunities. His proposals, which include caps on
government spending and changes to labor laws and the social
security system, have sent fund managers back to Brazil in
As the investors piled in, more deals appeared. Besides
Azul, the car rental company Movida, the water utility Sanepar
and two medical services providers — Hermes Pardini
and Alliar — have priced IPOs since the
impeachment. The listings have revitalized the market, after
investors bought just two IPOs in 2014 and 2015.
"This is the first sign of a government looking to do
reforms," says Angus. "This gave some hope that this is
something doable for the future… That is what opened
this [market window]."
The energy company Energisa raised 1.54 billion reais ($485
million) from a share sale in July last year that was billed as
a "re-IPO" and boosted its free float to 35%.
"We did not have much liquidity in equity and had a lot of
recommendations from investors," says Chyou Pey Tyng, corporate
finance manager at Energisa. "We thought it was a good time to
tap their resources... A lot of funds had experienced gains
with other stocks."
Energisa was overleveraged but it also wanted to raise money
for investments in its power distribution companies. "So we
looked at a way to get cost-effective financing," she says.
Now the state-owned reinsurance company IRB Brasil Re and
another medical services provider, Intermédica, have
both filed for IPOs. Meanwhile, the French retailer Carrefour
is in talks to spin off its local business before the end of
this year and the real estate developer BR Properties has told
the market of its plans for a share sale.
But not everything has proceeded smoothly. After recordings
surfaced in May of Temer purportedly discussing hush-money
payments to the former speaker of the lower house, Eduardo
Cunha, wary investors responded and sent Brazil’s
stock exchange into a tailspin.
The Bovespa stock index plunged more than 10% on May 18,
wiping out almost all the gains it had made since the beginning
of the year. But despite the concerns, the shopping center
operator BR Malls raised 1.73 billion reais from a follow-on
equity offering right after the allegations surfaced.
Temer has denied the charges, but some investors question
whether the president can withstand the blow to his already
dwindling approval ratings.
"He has lost some of his influence because of the recent
news," says Chuck Knudsen, an emerging markets portfolio
specialist at T. Rowe Price. "The political forces that are
against him may use this latest incident to try to force him
out. At this point, it appears that he will survive, although
it is a close call."
For Peter Taylor, a Latin America senior investment manager
at Aberdeen Asset Management, the political environment in
Brazil is worse than it was at the end of
Rousseff’s administration. "You have to look at
politics versus policy, and the politics is more of the same,"
he says. "The problem is, the government is now in paralysis,
and you question whether they can execute their stated
Reforms in question
A critical reform, in the eyes of investors, involves
overhauling Brazil's public pension system. Temer's
administration has proposed lifting the minimum age to qualify
for a state pension from an average of 54, to 65 for men and 62
for women. Such changes are imperative to address the country's
fiscal deficit, says Bruno Saraiva, the head of equity capital
markets for Brazil at Bank of America Merrill Lynch.
"Every year, the social security deficit has been in the
billions and it has been increasing," he says. "The Brazilian
structure is old. People now live longer, so we need to
Now, investors worry that the latest bribery allegations
could postpone the process. A Senate committee rejected the
reform bill in mid-May, raising the specter that the proposals
could stall in Congress.
Some argue that the market dip and prospect of better growth
will combine to spur lawmakers into action. Knudsen argues that
the country’s leaders have "no choice" but to pass
the reforms if they want economic growth to continue. The stock
market sell-off in May, he says, "put pressure on the
politicians. You must pass these reforms or you are going to
see a continued sell-off."
With presidential elections scheduled next year, politicians
will be keen to get the economy moving, he adds. "If the stock
market craters again, interest rates will have to go back up,
putting more pressure on the economy," Knudsen says.
Taking advantage of momentum
Despite the snarl-ups in the administration, the rise in the
equity market, lower interest rates and good first-quarter
earnings reports have managed to keep investors fairly
optimistic, BAML’s Saraiva says.
Azul, for example, posted net revenues of 1.87 billion reais
in the first quarter this year, up 12.3% on the same quarter
last year. The retail chain Lojas Renner also registered a
strong first quarter, with net revenues from merchandise sales
reaching 1.24 billion reais, up 14.7% year-on-year.
"There is earnings momentum in Brazil," Saraiva says. "The
momentum comes on the back of reduced interest rates and it has
brought earnings power to companies in Brazil."
Knudsen says stock buyers can find good opportunities in
sectors such as real estate, retail, consumer goods and
financial institutions. "Lojas Renner and Raia Drogasil, for
example, have been able to take on market share," he says.
"These are companies that can weather the tough
And despite the latest allegations, conditions are still
solid, say some.
"Even after the sell-off [in May], the market went from
probably overpriced to fair value," says Taylor at
"If I am a company owner, or a banker advising them,
I’m telling them it would have been even better to
come to market [before the Temer recordings]. But right now is
not bad timing either."
BAML's Saraiva expects some companies to capitalize on the
open market window, rather than face potentially further
political uncertainty next year. "All those companies that have
capex plans or M&A opportunities see the inflows and want
to get ready," he says. "Some don’t want to wait
until 2018 and are trying to anticipate their new investment
The same is true for shareholders wanting to divest. Qatar
Investment Authority, for example, sold shares in Santander
Brasil in April, reducing its stake to 3.4% from 5.5% and
raising 2 billion reais in the process. The sovereign wealth
fund capitalized on a rally in the bank’s American
depositary shares, which had climbed from as low as $5.06 in
June 2016 to peak at $11.61 in February.
Roderick Greenlees, the global head of investment banking at
Itaú BBA, says liquidity was buoyed by financial
sponsors that had invested in companies years ago. "It was time
for them to monetize, at least in part," he says.
The rebound in corporate earnings, lower interest rates and
the all-important reforms drove Brazilian stock prices above
where they should have been earlier this year, given the
uncertainty ahead, argues Taylor.
"If you believe in these pillars, then you would think the
valuations are now fair," he says. "If any of those pillars
fall away, then equities are certainly not cheap
The surge in stock prices earlier in the year came as fund
managers shifted their weightings on the country, moving from
underweight allocations to more bullish stances, says
Greenlees. Now, growth expectations alone are "more than
enough" reason reconsider Brazilian stocks, he says. "The
markets have been responsive and we should have a busy second
half of 2017."
Lawmakers' progress at pushing through reforms will likely
determine how busy Brazil's equity market is for the rest of
the year and into next. Investors understand that the changes
may not take effect until 2018 — but progress on
implementation alone can fuel fund inflows and spur demand for
"You have a country that is marching towards better economic
policies," says Knudsen from T. Rowe Price. "The end goal does
not change. The reforms must get passed, maybe in 2019, maybe
sooner." But Brazil, he says, is exhibiting a welcome political
will "to keep the momentum going". LF