Institutional investor’s share in stock market shrinks

Investment funds participation in business drops to 23.7% from 35% in 2019

01/16/2023

In a scenario of high real and nominal interest rates, with no prospect of a reversal in the short term, and still suffering from withdrawals from shareholders, the institutional investor — in this case, basically investment funds — has progressively shrunk its share in the Brazilian stock market. After reaching a peak, when accounting for a 35.2% share of business in 2019, the category saw its participation reduced to 23.7% on the 11th — the lowest percentage in 12 years, shows Valor Data survey.

The movement is opposite to that of foreign investors. More optimistic with Brazil — and with emerging markets as a whole — due to the reopening of the Chinese economy and the weakening of the dollar with a possible end of the tightening cycle of the Federal Reserve, international players now report 55.8% participation in the stock market, the highest level since 1994 — in 2019, this share was 42.6%.

The balance of contributions by non-residents in the secondary segment of B3 in the year already amounted to R$1.54 billion until the 11th, while the institutional investors accumulated withdrawals of R$965.9 million. Last year, the balance was R$100.8 billion positive for foreign investors and R$142.5 billion negative for the second group.

Part of the institutional investors’ movement is explained by the performance of the domestic fund industry last year, when there were redemptions in all modalities — R$158.1 billion in multimarket and stock funds, and another R$48.9 billion in fixed income funds. In other words, asset managers had to act in the face of this scenario.

Institutional investors temporarily returned to the stock market in the third quarter of 2022, precisely when the expectation for cuts in the Selic, Brazil’s benchmark interest rate, was more accurately priced by the market. But this was reversed after the first signs of the new administration, whether in the fiscal area, with the Transition PEC (the proposal to amend the Constitution), or in the assembly of the economic team, more political than the market wanted.

Joaquim Kokudai — Foto: Silvia Zamboni/ Valor

Joaquim Kokudai — Foto: Silvia Zamboni/ Valor

“I believe that the current positioning reflects what was already outlined in the election, with foreign investors preferring the new president and local investors wanting the incumbent’s reelection. The formation of the economic team and the first fiscal measures did not help either. Now, the Brazilian funds have developed this more cautious view, even if it is still too early to say that we will not have fiscal anchoring or something along this line,” said Joaquim Kokudai, head of Somma Investimentos.

In the executive’s view, if the new administration had taken better advantage of the initial days, the environment would be more favorable to enter the stock market now. In addition, despite having difficulties seeing any movement in the basic rate other than downwards, he says that the market will probably need more robust fiscal signals to price this.

Attractive stock prices don’t attract local investors as much, says Fabio Spinola, founding partner and manager of Apex Capital, because of the high interest rates in Brazil. “The foreigner doesn’t have an opportunity cost of 13.75%, which is the Selic rate. His opportunity cost is the American interest rate,” he said. “We were pricing interest rate cuts in the middle of the year, now we believe it will be at the end of the year, but in a small magnitude and subject to revision.”

According to Mr. Spinola, however, when the Minister of Finance, Fernando Haddad, starts to make clear the fiscal framework with which he will work, this should reduce the risk premiums that are high now because of the uncertainties. He also points out that this effect may be smaller for foreigners, who keep in mind the pragmatism of both previous Mr. Lula administrations, between 2003 and 2010.

He also approves the stronger presence of international investors in the Brazilian stock market — even pointing out the difference between the foreign investor, who studies the companies closely, and the trader, who usually buys indexes or more liquid companies. “I see the investor with good eyes. It’s like I’m saying that the local doesn’t have to be so negative. And you have to be careful because the market is so pessimistic that there could be a bullish move and the local investors won’t participate.”

Luiz Alves, manager of Versa Asset, believes that interest rates will need to fall because of the recession that is expected to occur this year. He projects that there will be a strong drop in activity already in the fourth quarter and, as much as there is an idea of maintaining rates, the recession will contain inflation, and interest rates will have to fall. “Then, if there is fiscal convergence by the Treasury, which is not so difficult, and the tax reform advances, we will have a favorable environment for the stock market to move forward,” he added.

However, even if there is a revision in profits in 2023, reflecting the projected recession, Mr. Alves believes that there is room for the much-vaunted repricing of local stocks, with investors projecting better numbers for 2024. He states that he currently operates with almost no cash on hand and maintains a strong position in retail, despite having increased his exposure to the financial and commodities sectors.

At Apex Capital, the long-only funds (which always bet on the appreciation of the stocks they invest in) are well allocated, with low cash: “I think there are a lot of cheap things, so I have little cash,” says Mr. Spinola. On the other hand, there is room to increase the long-short funds (who seek to gain both in the rise and fall of certain assets), if there is good clarity.”

According to him, the allocations of the moment are more defensive. “If we get into a more credible fiscal trajectory and a stronger possibility of interest rates falling, we can get more into cyclical companies, sectors like retail. We don’t have this today. We are more exposed to commodities, and in the financial sector,” said Mr. Spinola.

With no mandate to invest in the stock market, Rodrigo Melo, chief strategist of ASA Hedge, a multimarket fund from ASA Investments, says that the positioning in this modality is not only below historical levels, but negative. In the local market, he has what he calls a “double-carry” position, in which he operates long (betting on the rise) in the BRL, which has been helped by the interest rate differential, and short (betting on the fall) in the stock market. In the U.S., it is overbought (forecasting a rise) in interest rates and sold in the stock market.

ASA Investments did not invest in companies listed on the B3, not even in the commodities sector, one of the few that performed on the Brazilian stock exchange in 2022. “Before we even made directional investments in the companies, now we are trading the products directly. After the recent correction, for example, we added oil to the portfolio,” said Mr. Melo. “Our view doesn’t mean that no multimarket manager has a stock market, but it doesn’t seem to us a very favorable environment to make this move now.”

*By Matheus Prado, Augusto Decker — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Mills bet on sugar as ethanol loses steam amid political uncertainty

Some companies even consider making investments to ensure greater sugar production in the next harvest

01/16/2023

Uncertainties about what the Lula administration’s policies for fiscal balance, monetary policy, fuel pricing policy, and fuel tax policy will look like, in addition to doubts about the direction of the foreign exchange rate, are causing concern among sugarcane mills. As these factors tend to impact the ethanol market more immediately, sugarcane mills are already indicating that they could prioritize sugar production as a safe haven three months into the new harvest (2023/24).

According to Willian Hernandes, partner at Ribeirão Preto-based consultancy FG/A, there are even mills considering making investments to ensure greater sugar production capacity already in the next harvest, if necessary. “This [political] indecision is bad for [business] decisions. In this current tax scenario, making adjustments for sugar production to become larger is eminent,” he said.

An investment like this, however, can only be translated into effective production increase in at least six months – that is, if an investment decision is made now, it will only be reflected in increased sugar production from July on, at least, according to Ricardo Pinto, a partner at consultancy RPA.

As there are still many mills with idle capacity, this capacity may be filled by directing the largest supply of cane to sugar. But the capacity to reduce the ethanol supply is limited, says the consultant. “It is difficult to have big changes in volume only with mix adjustments.”

The record sugar production in the South-Central region was 38 million tonnes in the 2020/21 harvest, when the pandemic broke out, hitting the fuel market hard. At the time, the mills ended up directing all their production to sugar, for which there was still some demand. The two following harvests were shaken by drought and frost, but the consultants expect a resumption of the cane harvest in 2023/24.

The climate of uncertainty grew after the government published the provisional measure 1,157/2023, which postponed for two months the federal tax relief on fuels to allow time for reviewing the pricing policy. It is not known whether, after these two months, ethanol will recover the same special rate compared to gasoline as before the tax changes – as foreseen in the constitutional amendment approved last year – nor if and what will be the level of gasoline price control by Petrobras under future CEO Jean-Paul Prates.

The biggest fear of the mills is a repeat of what happened under President Dilma Rousseff, when domestic gasoline prices were kept well below international levels, which were high at the time, making it difficult for hydrous ethanol to compete at the pumps – and even affecting the sugar market because of the preference of mills to produce more of the sweetener.

An executive from one of the largest companies in the sector, however, told Valor on condition of anonymity that there may be an intermediation with Mr. Prates’s proposal for a price stabilization account. The alternative, however, still holds uncertainties and is expected to take a while to consolidate, creating a cloudy horizon in the first months of the harvest.

The mills are still studying whether to file a lawsuit against the federal government in case the tax relief is extended. But a normalization of the tax policy is not likely to change the scenario either. “Even if taxes on gasoline are resumed, ethanol price is unlikely to be higher than sugar price,” said Tiago Medeiros, director of the trading company Czarnikow.

The uncertainty is also causing caution in hedging, which is within the historical rate for this time of year. At Czarnikow, 65% of sugar exports for the next harvest are hedged, and 10% of exports for the 2024/25 harvest as well.

“The hedge, as much as it is a protection, brings uncertainties related to the cost, to the total return of the business, considering an ethanol scenario maybe less interesting with price controls put in place by Petrobras. The result is inaction,” said Mr. Medeiros.

The demerara sugar future contracts traded on the New York Stock Exchange that foresee deliveries during the harvest period in South-Central Brazil (for July and October) have also shown less attractive prices than the mid-crop contracts expired last year.

*By Camila Souza Ramos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil’s main customer, China shrinks in 2022 trade balance

Lower value of iron ore brings Chinese share down to 26.8% from over 30%

01/16/2023

After reaching a share of over 30% in 2020 and 2021, China’s share in Brazilian exports fell to 26.8% last year, especially because the value of iron ore shipped dropped. The share is also lower than in 2019, when the Asian country absorbed 28.7% of Brazilian exports. Still, China remains the main destination of Brazilian exports, followed by the United States, with 11.2%, and Argentina, with 4.6%.

Experts believe that China will recover its share in Brazilian shipments in 2023, but partially, within a general landscape of expected slowdown in the global economy.

Compared to 2021, the U.S.’s share in Brazilian exports remained stable, with an increase of only 0.1 percentage point. Argentina, which is expected to be the first country officially visited by President Luiz Inácio Lula da Silva, advanced 0.4 percentage point, but is still far from the 7.5% reached a decade ago.

With the drop in shipments to China, the trade surplus with the Asian country totaled $28.97 billion in 2022, equivalent to almost half of Brazil’s total surplus of $61.76 billion. Despite being robust, the China-Brazil trade surplus was lower than in 2021 ($40.26 billion), when the Asian country accounted for two-thirds of Brazil’s total surplus of $61.41 billion.

The 4.5 points of difference in China’s share were spread among several trading partners. Besides countries in Asia, such as India and Singapore, the European Union and Latin American countries like Chile, Mexico and Colombia increased their shares. In all these destinations, Brazilian exports increased more than the 19.1% of the average of the country’s total shipments, data by the Ministry of Development, Industry, Trade and Services (MDIC) show.

The shipments to the Chinese also grew, but at a slower pace, only 2.1%. The result can be explained mainly by iron ore, the second item most purchased by China. The Asian country absorbed $18.2 billion in Brazilian iron ore in 2022, down 37% year-over-year, because of lower prices after a peak in 2021. With the retreat, Brazilian ore exports virtually returned to the level of 2020, when the country shipped $18.5 billion.

Besides the effect of the ore price in 2021, China also gained space in Brazilian exports in 2020, when the pandemic hit. That year, the Asian country grew amid a widespread global recession, which also makes the base of comparison high and explains the lower growth of the Chinese appetite in 2022. The situation was different last year, with evidence of greater difficulty in the economic recovery of the Chinese economy.

Also in 2023, the performance of the Chinese economy is an important variable for the evolution of Brazilian exports, said economist Livio Ribeiro, a partner at BRCG Consultoria and researcher at the Brazilian Institute of Economics of Fundação Getulio Vargas (FGV/Ibre). In his view, China may regain a part of its share in 2023, but not all of it.

Despite general expectations in relation to the Chinese economy due to the recent decision to end the zero-Covid policy, Mr. Ribeiro still sees Beijing with difficulties to advance in the recovery of the domestic economy. In his view, the growth of Brazilian exports to China is likely to be driven more by iron ore and corn, a relatively new and rising item on the export list to the Asian country. But proteins, such as meat in general and soy, items more linked to family consumption, are unlikely to advance too much, he said.

The Chinese government’s policies to stimulate the domestic economy, he said, focus on investments. “But this China, today, is smaller than the China that consumes. As long as there is no decision to encourage consumer spending, there won’t be such a rapid movement to accelerate China’s growth.”

Sergio Vale, the chief economist of MB Associados, believes that the Chinese economy will be able to grow nearly 4% in 2023, with short-term stimulus measures. But this depends on how Covid-19 cycles will play out, he added. Depending on the effects of the disease’s impacts, the rate could fall to 3%. In Mr. Vale’s view, China’s consumption of Brazilian products, however, can benefit from the lower prices of iron ore, which will also have export values adjusted, in addition to a good Brazilian grain harvest.

In addition, he said, an advance in China’s share is likely to happen because, even with a slowdown, the Asian country is expected to grow in a scenario of sluggishness and a potential recession in important markets such as the United States and Europe.

Considering the expected global scenario of deceleration, José Augusto de Castro, head of the Brazilian Foreign Trade Association (AEB), projects for 2023 exports of $325.2 billion, which would mean a drop of 2.9% year-over-year. In this context, even if China maintains the level of demand for Brazilian items, it may gain ground in Brazilian shipments.

The 2022 scenario, he said, shows the reliance of Brazilian exports on agricultural or metallic commodities. Last year, despite the decrease in ore shipments, there was an advance in soybean and oil, the latter item driven mainly by price increases due to the Russia-Ukraine war. The three items, he said, probably accounted for 35.7% of Brazil’s export revenues last year, similar to the 35% in 2021.

Last year, the rise in oil prices also contributed to the advance of Brazilian exports. The sale of crude oil grew 39.5% and its share in Brazilian exports rose to 12.7% in 2022 from 10.9% in 2021 – it is very close now to the 13.9% share of soybeans.

The greater share of oil contributed to changes in the destination of Brazilian exports. The MDIC data highlights the rise of Singapore in recent years among the largest destinations of Brazilian products. In 2022, Singapore ranked seventh, with an increase of 43.4% in the purchase of Brazilian products in relation to the previous year. Although the advance is not new – the country’s share of Brazilian shipments increased to 2.5% in 2022 from 1.3% in 2019 –, oil exports also help explain this growth.

Of the $8.35 billion that Brazil sold to Singapore in goods in 2022, $5.9 billion was crude oil. Such a high volume, said Mr. Castro, suggests that the country re-exported Brazilian products to other countries in its region.

*By Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Sanitation market turns to municipal projects

Fourteen auctions may take place this year, bringing R$740m in new investments

01/16/2023

In 2023, the focus of the sanitation market is expected to turn to municipal projects as there is no prospect of large state auctions in the short term. Fourteen municipal auctions are in progress and may take place this year, bringing at least R$740 million in combined investments, according to a survey conducted by Abcon, a trade association of private-sector operators.

In the last two years, the “intermediary” market of smaller water and sewage concessions has drawn interest from the private sector. Small city auctions have attracted fierce competition, with more than 10 auctions and a wide range of competitors. Even new platforms have been created to operate in this segment.

On the other hand, the segment faces a number of challenges to accelerate expansion: regulatory uncertainties, doubts about the financing of projects, and the difficulty of municipalities to structure calls for tender are cited by experts and executives.

One criticism is that the market for municipal concessions move much more slowly than the market would like. “There is a lack of projects. There are many companies fighting over crumbs, and the bids are highly aggressive,” said Yves Besse, CEO of Cristalina. The company, founded in early 2022 with a focus on the segment, has yet to win contracts.

General Water, another company that seeks to expand operations in the segment, ended up directing its efforts to the private-sector market due to the lack of auctions. “We are still interested and analyzing opportunities, but growth has been slow,” said CEO Fernando de Barros Pereira.

But the supply of projects has advanced. Today, there are 101 (of cities and consortiums) in the modeling phase, according to a survey by Radar PPP conducted at Valor’s request. In May 2022, there were 66 projects.

Considering only mature projects – those with a defined model and in the public consultation or bidding stage –, the consulting firm mapped 56 projects, compared with 43 in the first half of 2022. “Since 2020, this market is moving,” said Frederico Ribeiro, a partner at Radar PPP.

In addition, 2023 is a good year for municipal auctions considering the electoral calendar. While states are at the beginning of each governor’s term in office, which generally puts new projects on hold, the municipalities are at the third year of each mayor’s term, which is considered more favorable for bidding as there has been enough time for structuring and the following election campaign, which typically affects projects, have not yet begun.

Despite the great expectation, specialists point out challenges that cast doubt on the segment’s advance. There are at least three types of problems.

The first is the signals given by the new federal administration in relation to the new sanitation law, said Frederico Turolla, a partner at Pezco Economics. In his view, even if there isn’t a change in the rules, there is a lower expectation of inspection for the fulfillment of the universalization goals – which discourages municipalities to get concessions off the drawing board, according to him.

“The regulatory framework brought requirements that depend a lot on government action. We already see a lower interest in projects amid the prospect of flexibilization,” he said.

A second factor that may hinder municipal concessions is the restricted access to federal funds, said Renato Sucupira, a partner at BF Capital. This limitation was imposed by the sanitation law, which aimed to stimulate regionalization.

Under the current rule, cities that make an independent project – rather than within regional blocks – cannot tap financing from federal banks, which hinders their viability. “It’s not an impediment, but it is discouraging,” he said. It remains to be seen how the new government will treat this rule, he added.

Finally, a third obstacle to the segment’s advancement is the difficulty that local governments have in structuring good calls for tender. This is an old problem that not only affects the sanitation market, and explains the high rates of project “mortality” – many of them are paralyzed or discussed in court due to inconsistencies.

“In recent years, we see an improvement in quality, but this is still a problem. In small and medium-sized cities, structuring capacity is often very limited,” said Frederico Bopp, a partner at the law firm Azevedo Sette Advogados.

Despite the challenges, the expectation is that the “intermediary” sanitation concession market will continue to expand. The question is how fast it will advance.

“I believe that the market will continue to grow. I don’t know if at the same speed and scope as Brazil, because I would have to multiply the speed. But it will grow,” said Mr. Pereira, with General Water.

Italo Joffily, founder of Ysanso, another recently created platform focused on mid-sized projects, said that the municipal projects market will not end, even if there are changes in the sanitation framework. “Municipalities were doing concessions before the law. So, if there is a setback, there may be a reduction in speed, but the market remains,” he said.

Today, the company is trying to draw investors to enable the acquisition of contracts and participation in auctions. According to the executive, there are talks with three funds – two from the United States and one from the Middle East. The recent regulatory uncertainties in the sector hinder the conversations, but are not an impediment, he said.

For Mr. Besse, with Cristalina, the advance in the number of models brings a good perspective. “The success of recent auctions, which had high fixed concession payments, is encouraging other cities to build concessions,” he said. The company focuses on projects in São Paulo, Minas Gerais, Santa Catarina, and Rio Grande do Sul.

In addition to auctions, Mr. Joffily notes that there will be opportunities in the secondary market, for example, with large operators selling assets that no longer fit in the portfolio.

In the case of the auctions of regional blocks, which have been structured by states, with the support of the Brazilian Development Bank (BNDES), the expectation is for 2023 is low. “It is hard to believe that state governments will launch anything. Even in cases of reelection, there are always changes in the teams,” said Camillo Fraga, a partner of the consulting firm Houer.

For him, even the Porto Alegre municipal project, which is already mature, may be delayed, because it is structured by BNDES – Houer is among the advisors of the development bank. Mr. Fraga believes that this auction, which is not on Abcon’s list, could still be held in 2023, which would add R$2.2 billion in new investments.

According to Abcon, besides the 14 projects planned for this year, there are 23 others on the radar, both at the municipal and the state levels, with the potential to generate at least R$14 billion in construction works. Yet, they are still in early stages.

*By Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Granja Faria keeps acquisitions on radar

In strong expansion, the egg company estimates revenues of R$2bn this year

01/13/2023

Denilson Dorigoni — Foto: Divulgação

Denilson Dorigoni — Foto: Divulgação

After investing more than R$1.5 billion in 15 acquisitions since it was created, in 2006, by businessman Ricardo Faria in Nova Mutum, Mato Grosso, Granja Faria is preparing to take the lead in the Brazilian commercial eggs market this year, with an expected revenue of R$2 billion, compared to R$1.3 billion in 2022.

The leap will be guaranteed mainly by the purchase of BL Ovos, announced in December and closed for R$290 million. But it also includes organic growth and the effective entry into the commercial phase of a new business field – the production of organomineral fertilizers.

In the meantime, however, new purchases may be announced. “We are prospecting,” said CEO Denilson Dorigoni. The executive explains that the total injection from the beginning includes assets and improvements and adjustments made after the incorporation.

Granja Faria is waiting for the green light from CADE, the antitrust regulator, to take over BL Ovos’s operations, and the company’s farms will also be improved with new technologies. The antitrust agency’s approval is expected to come in the coming weeks.

With the acquisition of BL, which has units in Espírito Santo and Goiás and posted revenues of R$300 million last year, Granja Faria expands its production and geographic presence. The brand is likely to be maintained because the egg market is still very regionalized.

“We have 22 units, all with their production and commercial areas. And with BL we will start serving Espírito Santo and Bahia, where we were not present,” said Mr. Dorigoni.

With headquarters and commercial egg production in Santa Catarina, and units in Rio Grande do Sul, Paraná, Minas Gerais, Goiás, and Tocantins, Granja Faria is focused on establishing itself in the Northeast region.

The fertile eggs are produced in units in Rio Grande do Sul, Santa Catarina, Paraná, Goiás, and Mato Grosso. In this division, 50% of the production is exported.

As the commercial eggs area was a natural consequence of the fertile eggs business, a large part of the company’s hens are free-range — about 1.5 million, out of a total that will reach 13 million, including the 3 million that will come with BL Ovos and the 4 million of the fertile egg division.

Mr. Dorigoni calculates, the total number of birds is around 200 million, and about 5 million of these are free-range.

Still in the egg segment, Granja Faria also has a processing industry that manufactures liquid and powdered products, sold to companies in the pasta and bakery segments, among others. This business accounts for nearly 5% of the company’s revenues.

Another area in which the company has been operating since 2021 is organomineral fertilizers. And for this one, the perspectives are for a strong advance in 2023, when production will start to take off in two plants, in Tocantins and Minas Gerais. The turnover was marginal in 2022 but is likely to reach R$200 million this year, according to the CEO.

*By Fernando Lopes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Drugmakers launch medical healthtech focused on cannabis

Startup will operate importing and distributing products

01/13/2023

Claudio Lottenberg — Foto: Ana Paula Paiva/Valor

Claudio Lottenberg — Foto: Ana Paula Paiva/Valor

Zion Medpharma and Tegra Pharma launched on Thursday Endogen, a startup the two drugmakers called “the largest medical cannabis healthtech” in Brazil.

The new medical cannabis and nutrition brand will operate by importing and distributing products. In addition, it will take actions aimed at medical education, to expand the access of patients in the country to therapies with cannabinoids – active ingredients of cannabis.

Zion works with pharmaceutical products NatureLab, a laboratory of nutritional supplements, and Tegra is a local leader in importing cannabis-derived products for medicinal purposes, according to the statement from Zion and Tegra.

The partners in Endogen said the project initially envisages a commercial and operational agreement, with the integration of their scientific, educational, and sales teams.

Claudio Lottenberg, Endogen’s co-founder and chairman, said that “the new brand will impact the entire medical cannabis chain in Brazil, with benefits for patients, physicians, shareholders, and the scientific community in Brazil.”

“The outcome of this partnership is very positive. We will promote medical education to train and guide health professionals on the prescription of cannabis-based products; and direct education to society,” said the physician, who is also chairman of Sociedade Beneficente Israelita Brasileira Albert Einstein, which controls the namesake hospital based in São Paulo.

The statement informs that according to the Brazilian Cannabis Yearbook edited by the specialized consulting firm Kaya Mind, the country currently has more than 180,000 patients being treated with medical cannabis, considering the different ways of legal access to the medicines, among them the two areas of activity of the new company: imports and purchase in drugstores.

Marcelo Galvão, founder of Tegra Pharma, said that Endogen’s value proposition “stands out because it unites a cannabis specialist with a relevant player in the pharmaceutical and nutritional market, with a presence in more than 70% of pharmacies in Brazil.” “Plus, it offers the best products in the market, at truly competitive prices,” he said.

According to the statement, the healthtech will offer about 50 products, including cannabis-based pharmaceuticals and nutritional supplements. Two of its medical cannabis products have already been approved by Anvisa (the country’s regulatory agency) for sale in pharmacies, and eight more are expected to receive the same authorization in the coming years.

Lukas Fischer, the co-founder of Zion Medpharma, said it will be a brand positioned in the pharmaceutical channel, which offers a category of health products that stimulate endogenous factors in a preventive way, from the inside out, to promote the body’s balance (homeostasis) and the integral well-being of the individual.

The creators of Endogen had a joint turnover of more than R$40 million in the last two years, according to the statement. They expect to reach R$50 million in the next year.

In its first round of investments, the healthtech had the participation of the Green Rock fund and is already making new funding (Series A) under the leadership of MMK Brasil. In the first half of the year, Endogen intends to launch a digital marketplace for medical cannabis.

*By Ivo Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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After rising employment, income recovery is challenge for 2023

Analysts predict that labor market will calm down and average income will evolve slowly

01/13/2023

Unlike what most economists expected, the recovery of the Brazilian labor market started in 2021 maintained steam in 2022 — not only recovering from the losses caused by the Covid-19 crisis but also bringing down the unemployment rate to levels not seen since 2014. However, even in the face of signs of red-hot hiring — which weakened at the end of the year, the real average income of workers grew more slowly and has not yet returned to pre-pandemic levels. Economists estimate that this process may come to an end only in 2023 or even in the following years.

According to the latest Continuous National Household Sample Survey (Pnad Contínua), the average real income of Brazilians reached R$2,629 in the October quarter, up 4.7% compared to the same period in 2021. Still, it is between 2% and 3% below the pre-pandemic period, depending on the seasonal adjustment applied.

Unlike the recovery in employment, which took place gradually between 2021 and 2022, the flattening of income has been slow to reverse itself. At first, after the pandemic hit, many Brazilians ended up accepting lower wages or lower job positions to get back into the market. This situation led the average real income of workers to drop 8.9% in December 2021, when compared to the levels seen in February 2020, according to calculations by LCA Consultoria.

“During the pandemic, the ample idleness of the market put the bargaining power in the hand of companies and employers,” says Rodolfo Margato, with XP Investimentos. “Now, with current unemployment even below the Nairu [rate below which the labor market begins to impact inflation], the situation has reversed and the bargaining power would be more on the side of employees,” he adds. Mr. Margato ponders that the situation varies a lot depending on the industry and the region — in Santa Catarina, the unemployment rate is around 5%, while in states of the Northeast it reaches 12%.

Another factor that “delayed” this convergence was inflation, whose variation in 12 months reached double-digit levels between September 2021 and July this year, which ended up eroding the purchasing power of the adjustments, even in the face of strong nominal increases.

With the expected deceleration of inflation in the coming months and a labor market still heated, the real income is expected to continue recovering, said Mr. Margato. XP calculates that this indicator is still 3% below the pre-pandemic level and that this hole will only be closed in the second half of 2023.

For Gabriel Couto, an economist at Santander, another factor that helps to slow down the recovery of the real income was the lack of adjustment for civil servants in the last two years. “A faster recovery, in this sense, would depend on movements to replace the losses of this segment of workers,” he says.

Mr. Couto evaluates that this movement will be slow in the short term, in the wake of a more restrained labor market. Santander estimates that the average annual unemployment rate may grow slightly again in the next two years, to 10.1% in 2024 from 9.5% in 2022. Accordingly, it says, the average real effective income — a metric that considers the usual income and also extraordinary or occasional variations, such as bonuses —, is not likely to fully recover until 2025 or stay until 2026.

Bruno Imaizumi — Foto: Leonardo Rodrigues/Valor

Bruno Imaizumi — Foto: Leonardo Rodrigues/Valor

In the calculations of Bruno Imaizumi, an economist at LCA Consultores, the return to the pre-pandemic level may only happen in the first half of 2026. Contributing to this very gradual scenario is a still significant contingent of the population with informal jobs and the cooling of employment dynamics.

Another way to measure the loss of purchasing power of workers, he says, is to use the basic food basket as a proportion of the average nominal income. Using prices practiced in São Paulo, Mr. Imaizumi calculates that, on average, workers spent 22% of their income to buy the basket in February 2020. The proportion reached 31.3% in April 2022 before dropping back to 27.7% in October.

“What I want to highlight is that income may improve, but perhaps not at the same speed as the variation of important prices for some groups, such as food,” he says. He estimates that the basic food basket would be 25.2% of income at the end of 2024. Mr. Imaizumi’s scenario also contemplates a relatively stable labor market, with the average unemployment rate dropping to 8.8% in 2023 from 9.2% in 2022.

A final factor that may help delay this movement is the slowdown in the generation of formal jobs — which generally pay better salaries. After consistently exceeding expectations in the first half of the year, the creation of formal jobs has lost momentum. In October, 159,000 jobs were created, according to the General Register of Employed and Unemployed Workers (Caged), against expectations of 210,000.

“Some studies are starting to show that, given the slowdown in the economy, informality is gaining some steam again,” says Rodolpho Tobler, an economist with the Brazilian Institute of Economics (Ibre), of Fundação Getulio Vargas. He ponders, however, that he hardly sees this rate surpassing 40%. In August, informality was a record 39.1%, but it has slightly decreased since then.

*By Marcelo Osakabe — São Paulo

Source: Valor International

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Asset managers try to assimilate Americanas shock

Drop in stocks, bonds will hurt shares

01/13/2023

It is not new to hear about possible “creative accounting” at the retail chain Americanas. However, the disclosure of a R$20 billion misclassification in the funding of suppliers and financial expenses — which will affect profit, equity, and leverage of old financial statements — fell like a bomb among asset managers and analysts. Some portfolios will be hurt by the devaluation, but others were betting the stocks would fall and will reap gains.

Asset manager Moat reported that its funds’ positions in Americanas common stock amounted on Thursday to a maximum of 8% of Moat Capital FIA’s master equity and that all positions in that asset are in line with the risk metrics of the respective portfolios, despite the stress scenario. “Like the market as a whole, we were surprised by the company’s notice of material fact. We will do everything in our power to guarantee and protect our rights as a minority shareholder and in defense of our investors.”

ARX released a statement to shareholders with estimates of the impact on the shares of its corporate debt funds. The ARX Everest master and the ARX Denali pension fund version had the largest exposures, of 1.2% and 1%, facing adjustments of -0.542% and -0.449%, respectively. The managers declined to comment. Western Asset, in turn, says it is monitoring the unfolding news and is waiting for more information about the next steps taken by the controlling shareholders to have the dimension of the impact on the company shares.

As Americanas is a large issuer of debt, its shares are widely spread in the market and most assets have some exposure, says a credit manager. He says his firm’s funds have positions in short-term bonds, maturing in May and June, which have covenants clauses — a leverage measurement requirement that if it exceeds a certain level triggers early buybacks or upon waiver request. “The willingness of bondholders today is to demand prepayment of these debts at least.”

“I would be shocked if it were R$5 billion, R$20 billion is a lot,” says a stock manager who has small exposure in the shares. After attending the company’s conference, he says he got the feeling that not even the executives who had just taken over and resigned know the size of the problem. When you look at the liabilities, with a total of R$32 billion, of which R$5 billion are suppliers — [outgoing CEO Sérgio] Rial spoke of a little more — and there is a R$20 billion divergence, it gives the impression that there is something off the financial statement.”

He recalls that two years ago, when Via (owner of Casas Bahia) unveiled a labor liability of about R$2 billion, all hell broke loose. Now it is a R$20 billion event for a company that has assets of R$15 billion. The doubt is how much the trio of partners, Jorge Paulo Lemman, Beto Sicupira, and Marcel Telles, from 3G Capital, the controlling group, will be willing to contribute to the company’s capital injection.

For the creditor banks, it was difficult to make any credit assessment of the company because the financial statements of recent years are not reliable. If they stop paying the suppliers, the Americanas will cease receiving products on the shelf and the business will become unviable. Mr. Rial’s message, he says, was that if this happens, the solution stops being through capital injection and goes to court-ordered reorganization. “If the banks don’t pull the rug under the company, Americanas will keep going, and the capital injection will happen, who knows how big.”

This manager says he sees some contagion to other B3-listed retailers, but looking at the statements of Via and Magazine Luiza, there is apparently greater transparency on operations to the total supplier funds. “If you look at it maliciously, executives have always received an aggressive compensation package for hitting targets. Those who benefited were the executives with a fat bank account on top of profitability levels that didn’t happen.”

The decision, for now, was to keep the 1% exposure in Americanas shares in the portfolio, which after Thursday’s devaluation (77.3%) will fall to a residual slice of 0.25%. “Under normal conditions, I would have more or reduce to zero, but right now, given that there is no information, I don’t do anything because the loss has already come.”

Stunned by a failure that seems to have been repeated for years without being noticed by the board of directors, auditors, and creditors, a stock manager who does arbitrage strategies tells that he had a short position in Americanas because he observed an inefficient operating cash burn and a higher margin than its competitors, which didn’t seem compatible. “I didn’t think it had an accounting inconsistency, I saw numbers that the company couldn’t explain, that generated some discomfort,” he said.

He maintains that transparency compared to other 3G Capital ventures was lower, with Ambev on an international level, and Americanas more prone to omitting information. “There was a big governance gap between two companies that belong to the same economic group. It was always a little bit strange, which makes us separate what is a trade and what is an investment.”

This manager believes that the problem with Americanas, on the audit side, is even greater than it was with Petrobras, where a lot of things went off the earnings report, according to the investigations disclosed during Operation Car Wash. In the current case, it was inside the statements. “It seems to have a worse reputational issue and raises questions about similar practices in other companies.”

The firm’s funds will report a positive result for Thursday. The manager says that the short position would continue to make sense, but that the rental market has practically dried up, with rates rising from 20% to almost 100%.

A credit manager who held Americanas bonds in the local market but was short on the company’s bonds overseas will also reap profits. It is worth making adjustments now, but he does not reveal why the strategy was not executed. “The most important thing is how this impacts the credit market as a whole. For now, we haven’t seen any forced selling.”

The stock analyst at an asset management company says that the R$20 billion figure is a legacy of the previous management, but instead of making a mega provision, downgrading to a loss whatever was necessary to put the house in order, Mr. Rial decided not to take that risk. “If it was just an accounting practice in the classification of the operation, putting the gain that should be financial and changing the line, taking it from operational to result, okay, but it’s trickier when it affects the gross profit.”

Ilan Arbetman — Foto: Leo Pinheiro/Valor

Ilan Arbetman — Foto: Leo Pinheiro/Valor

The accounting inconsistency raises questions about whether the episode will unfold into a systemic risk, which goes beyond the companies in the retail sector, said Ilan Arbetman, an equity analyst at Ativa Investimentos.

“When you are faced with a notice of material fact that has the resignation of the CEO and the institutional relations officer 10 days after they took over, under the justification that there may be a line of suppliers that overnight goes to more than R$20 billion from R$5 billion, it makes us rethink the analysis of financial statements as a whole,” he says.

Despite the questions about how Americanas will come out of this, he says that the operation between companies, suppliers, and banks is good for the whole chain, but if such a hole is proven, it becomes clear that an adjustment in this accounting is necessary. “The same way this is hidden in Americanas, it would set a precedent to at least investigate whether there is something of the same nature in other retailers, which often share market practices,” he says. “Thinking about the stock market and the capital market, it could spill over and raise the risk level of how Brazilian assets are viewed.”

Mr. Arbetman, with Ativa, evaluates that the case is more of an accounting failure than some kind of purposeful action to make up the numbers, but that there may be a loophole on the regulatory side that allows some kind of interpretation that caused this snowball. “I see that if the company and the auditors knew of the existence of this situation and the possibility of the numbers being contested, there could have been some kind of indication, either on the financial statement or in the press release, but it was not done.”

The analyst says that “luckily” he didn’t have the shares in his recommended portfolio since late last year, lowering the indication from “buy” to “neutral.” The asset will undergo a new re-evaluation.

Mantaro Capital also no longer had the shares in its fund, due to the assessment that the company was already in a weaker competitive position, especially in the e-commerce activity, says Andreas Ferreira, retail analyst at the asset. “The company had already been on a quarter-to-quarter leverage trajectory and had a problem with working capital, it burned a lot of cash,” he said.

Mr. Ferreira cites that, by the adjustments he makes internally, the debt/Ebitda ratio was already around six times and that, when considering this new surprise, the leverage could explode. For now, he adds, everything is preliminary, it is still necessary to know what the impact of the reclassification will be on the old financial statements and how the capital injection will take place. “Possibly, the company will have to downsize, make its operations more efficient, will enter survival mode, and will find it more difficult to retain and attract good people.”

Mr. Ferreira says that it is common in the retail sector to have operations in which the company assumes the drawn risk when banks advance funds to suppliers, but that in general they account for this correctly. Another possible contagion would be to the banks, but the sector in Brazil is solid and the risk seems to be well distributed.

An asset manager evaluates that the fact that the controlling shareholders are almost “celebrities” in the business world helps the market to have patience with the company, after the success of the creation of Ambev, a result of the merger of the Brahma and Antarctica breweries. “This ended up hiding a controversial governance history,” he says, citing, for example, the conversations that resulted in the merger with Interbrew, in 2004, in which the Belgian group agreed to buy the “bad Ambev”, with the shares that the controlling shareholders had, and in exchange, Ambev took a Canadian brewery using preferred shares and paying a high price for it.

The deal, valued at R$8 billion, provided for shared management even with a larger Belgian share in the combined operations that gave rise to Inbev, which would later become the world’s largest brewery. “Everybody forgot about it because it was a fantastic success.”

*By Adriana Cotias — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazil political crisis, persistent inflation in Davos’ agenda

Greatest global threat for next two years is cost-of-living crisis, says World Economic Forum survey

01/12/2023

The logo of the World Economy Forum is displayed at a window of the venue prior to the opening of the event in Davos last year — Foto: Markus Schreiber/AP

The logo of the World Economy Forum is displayed at a window of the venue prior to the opening of the event in Davos last year — Foto: Markus Schreiber/AP

The World Economic Forum launches every year a Global Risks Report ahead of the Davos meeting, which this year will take place next week in the Swiss Alps.

This time, the greatest planetary threat pointed out for the next two years is the cost-of-living crisis. In turn, climate and environmental risks are the central focus of global risk perception in the next decade.

The forum also summarizes the top five risks identified separately in different countries. The survey was conducted last year, between September 7th and October 5th, therefore well before the action of the extremist followers of former President Jair Bolsonaro in the Three Powers Square in Brasília.

Thus, in the survey with international executives, the threats to Brazil are rapid and/or persistent inflation; what they coyly call “proliferation of illicit economic activity,” as well as geopolitical confrontation, severe commodity price shock, and job/subsistence crisis.

It is clear that extremism by Mr. Bolsonaro’s supporters now poses questions about political stability in the country. This will lead Economy Minister Fernando Haddad and Environment Minister Marina Silva to talk a lot about the political situation alongside their respective agendas next week.

Globally, inflation management remains a strong concern, as the Davos survey shows.

“Rapid and/or persistent inflation” appears as the biggest threat in several G20 countries, including Brazil, South Korea, and Mexico. The rate has passed 80% in Argentina and Turkey, and in Zimbabwe, Venezuela, Lebanon, Syria, and Sudan it reaches triple-digit levels.

In most of the world, the fiasco to stabilize the price trajectory is evident. The strong concern continues over how to control inflation and protect the population from the cost-of-living crisis, without triggering a deep or prolonged recession that worsens the situation.

The risks involve pressures on food and energy supplies, which may persist for longer. The debt crisis and lasting economic slowdown lengthen the list of top 10 threats for the next two years.

Geopolitical conflicts, erosion of social cohesion, and polarization of society are persistent risks, now compounded by widespread cybercrime, cyber insecurity, and large-scale involuntary migration.

This situation affects efforts to combat other long-term threats involving climate change and biodiversity.

As Carolina Klint, with Marsh McLennan company, summarizes, 2023 is expected to be marked by risks related to food, energy, raw materials, and cybersecurity, causing further disruption in supply chains, and impacting investment decisions.

And attention is turning even more now to the unfolding situation in Latin America’s largest economy.

*By Assis Moreira — Geneva

Source: Valor International

https://valorinternational.globo.com/
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Government studies measures to improve credit for small farmers

Many producers face hindrances because they do not qualify for banks’ rules

01/12/2023

Wellington Dias and Paulo Teixeira — Foto: Divulgação/Roberta Aline/MDS

Wellington Dias and Paulo Teixeira — Foto: Divulgação/Roberta Aline/MDS

The ministers of Agrarian Development, Paulo Teixeira, and of Social Development, Wellington Dias, discussed on Wednesday measures to facilitate the funding of production in family farming and reduce hunger in rural areas. One action being studied is the creation of a guarantee fund to reduce red tape in the access of small producers to farm loans.

According to Mr. Teixeira, many farmers have a hard time tapping Crop Plan’s main lines the because they do not fit the conditions defined by the banking industry.

“We have found that typical lines of credit, like Pronaf, often does not reach the poorest and becomes elitist. This happens because many have bad credit with the banking system. We intend to review the Pronaf and think about a guarantee fund for loans to small farmers,” said the minister.

In a note, Mr. Dias said: “With a guarantee fund, we could facilitate access to credit with low interest rates and in a way it can be integrated to development and environment.”

At the meeting, the ministers also discussed ways to expand the Food Acquisition Program (PAA). In it, the federal government, through the National Supply Company (Conab), buys food from small producers and delivers it to schools, community restaurants, and social projects.

Another initiative under analysis is the updating of the Federal Unified Registration, of the Social Development Ministry. The idea is to identify people in vulnerable situations who need the government’s social policies in rural areas.

“The accuracy of this tool helps us, for example, to detect how many low-income people live in the countryside and what their main needs are,” said Mr. Dias.

*By Rafael Walendorff — Brasília

Source: Valor International

https://valorinternational.globo.com/
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