Brazil, China IPOs Thrive as Global Stocks Decline

From Bloomberg this morning:

In the midst of the biggest drop in global equities in five years, investors are profiting from initial public offerings from Brazil to India. Those opportunities will keep appearing in the months ahead.

Bovespa Holding SA, owner of Brazil's biggest stock exchange, has risen 43 percent since trading started Oct. 26 versus a 1.4 percent gain in the nation's benchmark index. India's Mundra Port & Special Economic Zone Ltd. has surged 121 percent since its IPO last week; the Sensitive Index rose 1.9 percent. Athletic clothing company China Dongxiang (Group) Co. advanced 26 percent since its Oct. 9 debut, while the Hang Seng Index in Hong Kong, where the stock trades, is up 1.5 percent.

More than half the record $255 billion raised this year through IPOs globally came from emerging markets, where economic growth is more than triple the rate of developed nations. Consumer, industrial and financial companies that went public since Sept. 30 posted an average 11.5 percent gain compared with the MSCI World Index's 1.4 percent slump through last week, data compiled by Bloomberg show. IPOs planned by XTEP (China) Co., a sneaker maker, and Bolsa Mexicana de Valores SA, owner of Mexico's bourse, may attract similar interest.

``People are uncertain about the growth outlook in developed markets, but they can certainly see plenty of growth potential in emerging markets,'' said Alex Tedder, who purchased Bovespa during the IPO and helps manage $7 billion in global stocks at American Century Investments in New York. ``These things are in great demand.''

Global Declines

The end of the buyout boom and the first decline in U.S. profits in five years sent the Standard & Poor's 500 Index down 10 percent for the first time since 2003 last month and erased more than $4 trillion from equity markets globally.

The S&P 500 fell 0.6 percent to 1,472.42 today, while the MSCI World lost 0.4 percent.

Investors snapped up new shares of Sao Paulo-based Bolsa de Mercadorias & Futuros-BM&F SA, Latin America's biggest derivatives market, in its IPO last week, offering to buy 14 times more stock than the company sold, according to a person familiar with the sale. The stock jumped 20 percent on its first day of trading.

China Railway

China Railway Group Ltd., the world's third-biggest construction company, surged 69 percent in its Shanghai trading debut today on optimism the nation's growing transport demand will spur earnings. The company raised 22.4 billion yuan in the Shanghai offering and another HK$19.2 billion in a Hong Kong IPO, people with direct knowledge of the sales said last month.

China, India, Brazil and other emerging-market nations will expand 7.4 percent next year, compared with a rate of 2.2 percent in industrialized regions including the U.S., Japan and Europe, according to International Monetary Fund projections.

In the U.S., where subprime mortgage losses have caused the worst housing recession in 16 years, the economy may expand 1.9 percent in 2008, according to the IMF.

``The emerging markets are a few steps removed,'' said Henrik Strabo, chief investment officer at Clay Finlay Inc. in New York, which manages more than $5 billion. ``Even if things get a little rusty here, the emerging markets will still be OK.''

Financial, consumer and industrial companies sold about $48 billion in shares through IPOs this quarter, or 72 percent of all offerings globally. A total 131 companies in developing nations have raised $35.4 billion through IPOs in the same period, versus $32.7 billion raised by 117 companies in developed countries. Emerging-market IPOs also outpaced those from developed nations in the first nine months of the year, with $98.4 billion raised compared with $89.2 billion.

`In Heaven'

Investors bought $3.7 billion of Sao Paulo-based Bovespa's shares on expectations Latin America's fastest-growing bourse will keep expanding after trading jumped sixfold since 2000. BM&F tapped into that demand when it raised $3.4 billion last week.

The performance of exchanges has ``nothing whatsoever to do with the level or direction of stock prices,'' said Lawrence Goldstein, general partner at Santa Monica Partners LP in Larchmont, New York, who manages about $200 million and holds shares of NYSE Euronext, owner of the New York Stock Exchange. ``As long as stocks or derivatives trade, you're in heaven.''

Bolsa Mexicana, Mexico's biggest stock exchange, will pique investor interest when it sells shares in early 2008 because bourses tend to be profitable, said Gerardo Copca, equity analyst at financial consulting firm Metanalisis in Mexico City.

XTEP (China) hired New York-based JPMorgan Chase & Co. and Zurich-based UBS AG in August to help arrange a $300 million IPO, making it one of about 100 companies located in Brazil, Russia, India and China that have pending offerings, data compiled by Bloomberg show.

China Growth

China Dongxiang, located in Beijing, rose since its debut on speculation increased employment will boost the buying power of the nation's consumers. China's retail sales in October rose at the fastest pace in eight years as consumers in the world's fastest-growing major economy got richer and inflation accelerated, according to government data.

Expectations for gains in the newest emerging-market stocks may be too sanguine. BM&F sold shares for 36 times estimated 2009 earnings, while Bovespa's price-to-earnings ratio is 30, according to London-based Victoire Finance Capital. That compares with the S&P 500's P/E of 18.

`Pretty Expensive'

``They look pretty expensive to me,'' said David Semple, whose $185 million Van Eck Emerging Markets Fund outperformed 93 percent of its peers last year. ``There's unprecedented levels of activity in emerging markets. They're very much at risk if activity tails off.''

Billionaire investor Kenneth Fisher of Fisher Investments Inc. said the price justifies the risk, and IPOs provide fund managers a way to profit when earnings growth slows.

``What people want right now are good things, not bad things,'' said Fisher, who oversees more than $45 billion from Woodside, California. ``They want things that in their mind don't have a lot of fleas in them. Invariably with IPOs people tend to think they're pretty good.''