By Barney Jopson
Published: November 11 2010 18:52
From a desk in London or New York, talk of capital flowing into emerging markets can have an abstract feel. But the money has been rushing into tangible places: oilfields in the Atlantic’s Santos basin, the pipework of online Russia, coal pits in Chhattisgarh, and the rural branches of a lumbering Chinese bank.
These assets are controlled by four companies that have been sold on the stock markets of Brazil, Russia, India and China in the past four months, through initial public offerings and secondary share issues that, between them, raised $54bn of capital and generated an equal amount of buzz.
The share sales have embodied a defining feature of today’s investment world – the exuberance over fast-growing emerging markets – and there are more of them to come.
But they also encapsulate why some market watchers say Bric countries are in a new bubble, likely to be inflated further by liquidity from the US Federal Reserve’s second round of quantitative easing, or QE2.
Timothy Ash, head of emerging markets research at Royal Bank of Scotland, wrote on beyondbrics, the FT’s emerging markets blog: “Emerging markets offer higher growth from a lower base. Such catch-up potential does indeed exist. But beware: not all the hyped countries have the fundamentals to justify the new thinking.
In August, Agricultural Bank of China, the weakest of China’s large state-controlled banks, became the world’s largest IPO when it exercised an overallotment quota to bring the total amount it raised to about $22bn.
The following month the mantle of the world’s biggest share sale switched to Petrobras, which is drilling for oil deep in the Santos basin and which launched a secondary share issue that raised $27.5bn from private investors.
Coal India, which owns the pits in Chhattisgarh, raised $3.5bn last month in India’s biggest initial public offering, which was 15 times subscribed. And in a flotation last Friday that brought back memories of the internet bubble, Mail.ru, a Russian internet portal with a 2.4 per cent stake in Facebook, raised $912m in London and was 20 times subscribed.
"There’s a wall of money out there looking to get into equity,” says Titus Dakwah of Nubuke Investments, a hedge fund specialising in Africa, where last month’s $14bn IPO of Dangote Cement in Nigeria added to the IPO fever.
“A big IPO focuses investor’s attention, of course it does,” says Mr Dakwah. “The attraction is price. That’s it. These companies are trying to pitch themselves at an attractive discount.”
The deals have helped to absorb some of the capital flooding into emerging market equity funds, which have attracted $74bn of net inflows in the year to date, according to EPFR Global, which tracks fund flows.
The Fed’s QE2 will create $600bn of new liquidity and Brian Coulton, global emerging markets strategist at Legal & General Investment Management predicts that between one-quarter and one-third of that will end up in emerging markets.
The scramble to get hold of new share issues comes as FTSE’s emerging market index is up 148 per cent from a trough in March 2009.
That stellar rise in equity prices is one sign that markets could be entering bubble territory. Added to that is a sense that liquidity is latching on to nothing more than an abstract idea – “high growth” – which has taken over from analysis of corporate fundamentals as the main determinant of valuations.
Between countries valuations vary: the priciest Bric is India, trading on a forecast 2010 price-earnings multiple of 20 times, and the cheapest is Russia at 7.3 times. Cheerleaders say that overall emerging markets are still good value, trading on a p/e multiple of 11.3 times for next year versus 12.1 times for developed markets. “Our view is that it’s not a bubble,” says Todd Henry, emerging markets equity portfolio specialist at T Rowe Price, a fund manager.
“But we’ve had a great performance run since the end of 2008, there are rising risks, and a 10-15 per cent correction is not out of the question. But we would see that as an opportunity to build positions in the asset class.”
The most sought-after IPOs have come in three areas: commodities; financials, including AIA, the life assurer that raised nearly $18bn in an IPO last month in Hong Kong; and companies producing anything on which middle-class consumers spend their money.
Emmanuel Gueroult, a senior capital markets banker at Morgan Stanley who has worked on some of the IPOs, says: “We’ve deliberately widened the investor audience beyond traditional EM specialists and made sure that global funds, sector specialists, and also domestic institutions were also approached in each of our transactions.”
By creating new stock in large quantities, IPOs such as Coal India and Dangote Cement have created the first opportunity for some global pension and insurance funds to invest in countries where they could not previously find shares on the scale they need.
The best companies tended to come to the market first having been delayed by the global financial crisis. Now Mr Henry at T Rowe Price says: “The overall quality has started to come down and valuations tend to be at the high end, although there are still good companies coming at reasonable valuations.”
Simon Derrick, head of currency strategy at Bank of New York Mellon, says powerful forces have been unleashed by QE2 – and the weakness of the eurozone – and that these will continue to drive emerging market assets in the weeks ahead.
“However, it would be remiss of us not to also note that this seems eerily reminiscent of the final months of the dotcom boom,” he adds, warning that emerging market equities, currencies and debt could be the TMT stocks of 10 years ago.
“If so then one of our tasks in the coming months is to work out which emerging market is the equivalent of Apple – up 3,000 per cent in a decade – and which compares to Pets.com.”
Additional reporting by Peter Garnham
Copyright The Financial Times Limited 2010.
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