International investors have withdrawn R$22 bn from B3 this year, despite seeing opportunities in Brazil
03/28/2024
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Foreign investors posted net withdrawals of R$22.19 billion in the secondary segment this year at B3 — Foto: Divulgação
External uncertainties that have been hitting the domestic stock market are now combined with local interferences, weighing on important shares in Benchmark stock index Ibovespa such as Vale and Petrobras. As a result, the Brazilian stock market has underperformed its emerging peers, in a scenario that also includes a substantial outflow of foreign capital.
Uncertainties involving state-owned companies were added to factors that contributed to the outflow of funds from the Brazilian stock market, a trend observed since early this year. According to the most recent data released by the B3 stock exchange, foreign investors posted net withdrawals of R$22.19 billion in the secondary segment of the exchange (shares already listed) this year until March 22, the highest volume since 2020.
Statements made by people close to the government have been raising concerns since President Lula was elected, but the decision by state-owned company Petrobras not to pay extraordinary dividends raised a flag and led to significant losses in the market. The decision surprised most investors—on the day it was announced, the oil giant’s shares fell by 10%, leading the company to lose R$56 billion in market capitalization. As a result, the company’s preferred stock, which ended 2023 up 94%, is down 4% this year.
Overall, the performance of Brazilian shares is well below its peers. A survey by J.P. Morgan reveals that the MSCI Brazil index, measured in dollars, has posted the worst return in 2024, with losses of around 8%. In the same time range, the MSCI China is down 1% and the MSCI for emerging markets is up around 2%. The S&P 500, in turn, is up around 10%.
“We have seen a substantial outflow from the stock market since the beginning of the year. However, that should be put into perspective, since, at the end of last year, we saw a very positive inflow. The market rally in November and December was very strong,” said Luis Fernando Azevedo, equity manager at Oriz Partners. “Since earlier this year, the scenario has changed and the market has realized that the pace of interest rate cuts abroad may not be as intense as expected.”
“Here, we saw some interference involving state-owned companies, which raised concerns. Perhaps it is rather a one-off event than a change in the outlook for the broader market, but the then optimistic foreign investor may have been affected. It is an interference, a reason for an increase in volatility,” Mr. Azevedo said.
In this context, the recommendation made by Goldman Sachs strategists for investors to bet against Brazilian state-owned companies gained the market’s attention According to the bank’s analysts, the multiples of state-owned companies are too high compared to private sector companies, and possible political interference could lead to cuts in these companies’ ratings.
Renato Jerusalmi, founding partner and portfolio manager at Riza Asset, said that the four stocks mentioned by Goldman—Petrobras, Banco do Brasil, Sabesp, and Cemig—should not be placed in the same basket. According to him, BB has the lowest discount to its peers when considering the last ten years. Petrobras, however, when compared to the largest companies in the sector globally, has a discount of 44%, above the range seen in the last five years, which was between 30% and 34%.
“We are seeing greater intervention in Petrobras. We went from political effect to practical impact, as seen in the decision on the distribution of dividends,” Mr. Jerusalmi said. “The market digested it and became more defensive, seeking to increasingly reduce its risk [exposure] in Brazil.”
Affected by political interference in state-owned companies, since the multibillion capitalization of Petrobras in 2010, Rio Bravo Investimentos stopped buying assets that have this level of risk, said Evandro Buccini, partner and director of credit and multimarket management at the firm. “March was a scary month for the stock market, with Vale and Petrobras performing poorly due to the government’s attempt to interfere in large companies. That is not good at all.”
Mr. Buccini said the issue involving the B3 giants is one of the reasons why foreign investors left Brazil. “I don’t think it’s the only reason, but it certainly helps. Once bitten, twice shy,” he said.
*Por Victor Rezende, Augusto Decker, Adriana Cotias, Liane Thedim — São Paulo, Rio de Janeiro
Source: Valor International