Whenever investment banks talk up a new product or trend, it’s always best to be wary. But the signs are that emerging markets to emerging markets deal flow – the latest new big thing – will soon become part of everyday capital markets life.
Three big deals are in the pipeline.
The one grabbing the most headlines is the decision by Brazilian firm Vale, the world’s biggest iron ore miner, to list on the Hong Kong Stock Exchange, thus becoming the first Latin American company to do so. Vale has a market capitalization of $164 billion and is already listed in São Paulo, Paris and New York. But Asia, especially China, is home to the most important customers for commodity companies. Vale will follow in the footsteps of Russia’s Rusal, which earlier this year became the first non-Asian firm to sell shares through the Hang Seng. Other big emerging market companies are also considering the possibility of a Hong Kong listing. Vale’s compatriot, Petrobras, might issue depositary receipts. Kazakh and South African resource companies are making noises too.
The second possible transaction is a Brazilian real-denominated international bond from Russia’s VTB. The state-owned bank is mulling over a five-year deal raising about R$500 million ($288.7 million). Although the deal has been postponed because of market volatility, the very fact that a Russian bank is keen to sell real-denominated debt and that global investors have indicated they want that exposure is testimony to the strides that Brazil and Russia have taken over the past decade. The Russian bank might also issue a Korean won deal next year.
The third mooted deal is a multi-currency Islamic bond issued by the Dubai government in Malaysia. It would be the first foreign sovereign sukuk issue in Malaysia, the world’s leading centre for Islamic bonds. Dubai has closer ties with Asia. For example, the prospectus for the government’s $1.25 billion bond issue in October revealed the existence of a previously unknown $1 billion loan from China Construction Bank. That bond, moreover, attracted big interest from Asia, which accounted for more than a third of the buyer base.
For global investment banks the challenge is how to tap into these flows. It won’t be easy. Some are already too late to the emerging markets game, others simply lack the scale. Then there’s the growing competition from the local investment banks, which account for 46% of emerging markets capital markets activity this year.
All of this is yet another sign of how the balance of financial power is moving between the west and the leading growth economies. That shift in global economic power will be far from linear and the eventual outcome its still unclear. US influence, however, is waning. The juiciest investment banking deals will be done between one developing economy and another. It’s the new global reality.
