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Wednesday, 19 September 2018

Could the emerging markets sell-off close the fall IPO window earlier than expected?

**#1 IPO WATCH- Could the EM Zombie Apocalypse close the fall IPO window earlier than expected? As we first suggested two weeks ago, analysts are concerned that negative sentiment on global emerging markets could drive investors away from a wave of share sales expected on the Egyptian Exchange in the coming months, Reuters reports. “A realistic good scenario is that you stick to your timeline and you’re able to sell your entire pipeline of offerings at very compelling valuations,” says our friend Wael Ziada, founder of Zilla Capital and former head of research at EFG Hermes. “A bad scenario is that if there is a deep, deep crisis in emerging markets, you may have to pull some of these offerings.”

Who is in the queue? Private sector players including education outfit CIRA, consumer and structured finance provider Sarwa Capital, and Rameda Pharma are all exploring fall IPOs, and as many as five state-owned companies are expected to tap the EGX before the end of the year.

Appetite for the share sales will shed light on the odds Egypt can withstand the EM crisis if it gets any deeper. Some analysts believe that the government “was stretching the ability of banks managing the offerings and the appetites of investors” with its targets for the privatization program, from which it hopes to raise EGP 10 bn by the end of FY2018-19. Private sector offerings could surpass that, says Beltone’s Mohamed Elakhdar, who believes that “people are viewing Egypt differently than the rest of emerging markets.” CI Capital’s Hany Farahat agreed that the appetite exists, but that “the key challenge is related to the process, how these transactions have to be structured and marketed to investors. This is what could make them a big success or failure.” Both firms are advising on IPOs due to tap the market this fall.

All of this comes as sentiment on global growth is at its worst level since December 2011. Investor sentiment on global economic growth has “worsened significantly,” according to a Bank of America Merrill Lynch report, which found that investors have been trimming exposure to EM in favour of cash holdings. Some 24% of those surveyed in the report, which was picked up by Reuters and the Financial Times, believe that global growth will slow down in the coming year, with a looming trade war between the US and China being the main risk factor. Other factors driving the negative outlook include the persistence of the emerging market sell-off and the uncertainty European markets face after Brexit.

Wait — it gets worse: The boss of Emirates airlines thinks we’re looking at a mini-financial crisis within 2-3 years as “there is going to be a major reset.” Celebrity hedge fund boss Ray Dalio agrees, saying it feels a lot like 1937 at the moment and that a downturn is coming in the next two years.

The silver lining? The EM Zombie Apocalypse is overdone, Goldman Sachs Asset Management has signalled by taking positions in Turkey and Argentina.

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