I guess we’re done with the bonhomie and musketeer spirit of the credit crunch era. Janet Yellen says the Federal Reserve will only change its course on tapering if emerging markets pose a threat to the US economic outlook. Harsh, but you can see where they’re coming from. The Fed doesn’t believe emerging markets represent a systemic market risk and their economic downturn isn’t a vastly significant economic risk for the US either. The so-called ‘Fragile Five’ emerging markets – account for just 6% of US exports. Relatively stable Mexico counts for 13%. According to Goldman Sachs, about 18% of European company revenues derive from emerging market economies, compared to 15% for the S&P 500.
So, the tapering of US monetary support continues, unless we see signs of contagion – or if that Q1 weakness in US numbers isn’t just snow related. Suspect not, but hard to say conclusively until we get a warmer set of numbers.
Emerging markets centre stage
The continuing tension between emerging markets’ challenge and potential will keep these economies centre stage in 2014. According to EY’s latest analysis, growth in our 25 rapid-growth markets (RGMs) will rebound to 4.7% this year and top 5% by 2015. However, if markets react badly to US monetary tightening, capital flight and currency weakness could limit growth to 3.7% this year and 2.8% in 2015.
Market pressure is also creating increasingly divergent outlooks. Tighter monetary policy is weighing on growth in Brazil, but energy reforms in Mexico are encouraging private investment and could trigger faster growth this year. Political tensions will also play a role in heightening uncertainty, with general elections due in a number of troubled economies – notably South Africa and India, where political impasse has stalled the bold reform required to lift growth.
Investing in emerging markets remains a risky business, but given the potential of these markets, companies may consider this a risk worth taking, so long as they can control costs through periods of demand and currency volatility.
This little IPO came to market….
Confidence in the initial public offering (IPO) market continues to grow in 2014, undented by market machinations elsewhere. Last year ended on a high in the London IPO market, which had its most active year since the start of the global financial crisis. EY expects the global IPO recovery to raise up to £45bn from as many as 300 deals in the first quarter of 2014 – up 80% from the same period last year. This would put Q1 2014 on a par with first-quarter levels in 2005-2008.
Where has this rapacious appetite come from? A lack of quality supply combined with ample funding. Over 1,500 global IPOs were withdrawn between August 2007 and the end of 2013, with low valuations discouraging owners from brining quality assets to market. Meanwhile, equity funds have seen substantial inflows, leading to pent up demand. In recent months, rising valuations and further pledges on interest rates have changed the dynamics of the market and now almost 500 companies are the global IPO pipeline – 40% higher than 2013. Not all of these will float – many are in dual processes, taking advantage of increasing demand in M&A markets. Nevertheless, it still looks like being a record year in 2014.
At present, we’re mainly seeing the first wave of assets, many held by Private Equity, who are taking advantage of much improved valuations to sell off the cream of their portfolio. Improving valuations may encourage the sale of assets with less compelling stories. In such a crowded market, companies will need to work hard to stand out from the competition and differentiate themselves from the throng.
Globally, sectors that will lead the way in IPOs in 2014 include technology, real estate and financial. In the UK, we expect more technology IPOs later in the year. However, the first quarter is all about retail with an enthusiasm that belies mixed retail sales figures, tough competition and the sectors structural challenges. Faith in the boosted housing market, falling inflation, low interest rates and improving consumer credit conditions provide enough upside to tempt investors to buy into retailers as yet untainted by profit warnings. However, it may be hard to sustain some of the recent more eyebrow raising valuations without a substantial improvement in the consumer outlook and a rise in real incomes.