The pain of listed equity investors has dominated recent headlines, but those exposed to less liquid private equity assets will soon find that they are also in the same boat. Late-stage funding deals are already seeing downward pressure, as IPO exit routes get closed off, and this trend will likely filter down through to Seed-stage deals.
The key culprits are higher interest rates and less rosy macro growth projections, both of which disproportionately impact the high-growth companies in which venture capital firms invest. The result is that start-up companies are likely to switch from growth to cash-conservation mode, meaning product roll-outs/upgrades and marketing campaigns get delayed or shelved.
The good news from this bleak picture is that, for those companies that can survive the downturn and for those funds that can snap up bargains, the next upswing will likely prove to be highly lucrative.
Colombian equities (IEQC index) are up 12%, in total US$ return terms ytd, below the best-performing regional peers, Chile (up 29%) and Brazil (up 25%), but more in line with the best-performing global EM oil exporter peers, Saudi Arabia (up 16%) and Kuwait (up 14%).
Trailing PB of 1.0x (for 11% ROE) is a 12% discount to the 5-year median. This is a similar discount to that seen across LatAm peers. But Colombia’s FX rate is arguably cheaper than these peers; should the real effective exchange rate return to its 10-year median, then there is 20% upside in the peso. Compared with oil exporter peers in EM, Colombia appears much cheaper.
Of course, there are concerns about a tilt left in economic policy, notwithstanding the challenge that has emerged from Hernandez, should he unite the centrist and rightist electorate, and the fragmented Congress through which Petro may struggle to pass radical legislation. But Colombia's valuation arguably already compensates for this, particularly in comparison with the oil exporter peer group.
Kenya’s 10-year eurobond has sold off sharply this year, with the yield on the KENINT 8 05/22/2032s rising from 6.74% at the end of 2021 to a peak of 11.48% on 19 May (and prices falling 27% over that same period).
Although risks are clearly elevated in Kenya, markets appeared to be pricing a higher risk of distress than was justified by fundamentals, in our view (with large twin deficits and debt stock set against an IMF-backed consolidation program and relatively robust external buffers and growth).
Notwithstanding last week's c120bps rally in spreads and the impending supply risk, we think the KENINT 8 05/22/2032s could rally another 100bps and upgrade our recommendation to Buy at US$87.2 (10.06% YTM, 775bps z-spread) with a spread target of 675bps, 100bps inside of current levels.
A list of well-known negatives may suggest that fundamental concerns on China (crackdown on tech, real estate debt, etc.) might be well understood and already reflected in valuation, and that investors may react more to positive than negative news. On the positive side, China has the following in its favour:
Policy stimulus capacity, which is very rare in EM, with a real interest rate of positive 0.8% (compared with negative 2.6% in India) and gross government debt/GDP of 78% (compared with 87% in India);
Cheaper valuation relative to history compared with peers in EM, eg trailing PB is on a c15% discount to the five-year median, albeit there is 5% FX rate downside should REER revert to its 10-year median (the equivalent respective figures for India are c15% premium and 4% downside, and for Saudi Arabia a c55% premium and 5% downside); and
Very low representation in global equity indices compared with the size of its market cap (by a factor of c2.5x) or GDP (c5x).
We have a Buy recommendation on Thai Beverage (THBEV SP) at a target price of SGD1.26, implying 83% upside.
On 5 May, Thai Beverage announced that it is renewing plans to spin off its beer business in an IPO. Appropriately enough, the entity will be called BeerCo. The IPO could raise US$700mn-800mn, with the listing taking place in July or August, and could be accretive.
A heady brew of factors makes the timing of the beer IPO ideal. The beer segment is recording higher volumes than in the pre-pandemic era and consumption in Thailand and Vietnam rose 10% and 27% yoy, respectively, in April.
The reopening of both countries to international tourism is likely to be a key driver. Tourists consume almost one-third of beer volumes in both countries.
Thai Bev is trading at just 12.7x FY 23F EV/EBITDA, which is 16% below the Asian peer average. On a historical basis, the stock is at the bottom end of its 10-year PE and PB valuations.