Weekly outflow is the largest since the series began in 2008 as election uncertainty and high real rates weigh on local equities
Foreign investors pulled R$12.6 billion from stocks already listed on B3 between August 10 and 14, the largest weekly outflow since the data series began in 2008, based on Bloomberg figures. A more cautious stance ahead of Brazil’s elections and intensifying competition for global capital are among the factors behind the move, emerging-market fund managers told Valor.
After inflows peaked at R$56.4 billion in April, non-resident investors withdrew R$38.2 billion over the following four months. In just 10 trading sessions in August, outflows totaled R$18.1 billion, putting pressure on the benchmark Ibovespa stock index, which is down 6.55% this month.
On Tuesday (18), the Ibovespa fell 0.27% to 166,335 points. Against that backdrop, net foreign inflows into Brazilian equities for the year have fallen to R$18.2 billion, virtually the same amount withdrawn in August alone.
Election risk
With technical positioning in Brazilian equities already very light, Daniela da Costa-Bulthuis, an emerging-markets portfolio manager at Dutch asset manager Robeco, said foreign capital is being pulled out by tougher competition for investment flows as well as a lack of clarity over the outcome of the presidential election.
“Domestically, investors are demanding a higher risk premium as the elections approach and visibility on policies for the post-2026 period remains limited,” Costa-Bulthuis said. “Meanwhile, globally, capital is being reallocated to markets with stronger growth and technology exposure, while higher fixed-income yields in the U.S. have reduced the relative attractiveness of some emerging markets.”
While she continues to hold high-quality Brazilian companies with strong balance sheets, Costa-Bulthuis said she would need greater clarity on a “credible fiscal consolidation for 2027” before becoming more constructive on the Brazilian market as a whole.
Raphael Luescher, co-head of emerging-market equities at Switzerland’s Vontobel Asset Management, also said that while equity valuations are objectively cheap, the near-term risk-reward trade-off has been squeezed by election uncertainty, fiscal deterioration and persistently high real interest rates.
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“The market appears to be in a holding pattern amid the political stalemate and the approaching October presidential election, whose outcome will likely be the main catalyst for a repricing of assets in either direction,” Luescher said.
Beyond the presidential race, the composition of Congress will be critical in determining fiscal credibility and the prospects for reform, in Vontobel’s view.
“A president without a functioning coalition in Congress cannot pass constitutional reforms,” Luescher said. “For now, specific and quantified fiscal commitments, especially regarding mandatory spending, remain scarce.”
Despite concerns over election-driven volatility and the sharp foreign outflows, Vontobel remains overweight Brazil in its emerging-market equity funds.
Long-term case
Luescher said the allocation to Brazilian stocks is driven primarily by a long-term view and company fundamentals. The firm focuses on sector leaders with rising returns on invested capital (ROIC) that trade at relatively attractive valuations.
“More broadly, cash-flow returns are mispriced and attractive from a historical perspective, creating an interesting opportunity for long-term investors.”
Beyond the elections, a more modest-than-expected cycle of Selic base rate cuts has also reduced foreign appetite for Brazilian assets, Costa-Bulthuis said. The Central Bank’s cautious tone suggests that “the scope for further reductions is limited and monetary policy will remain quite restrictive,” she added.
Luescher expressed a similar view, pointing to persistently high real interest rates as a key concern for equity investors.
“As long as inflation remains above target, partly driven by the expansion of fiscal stimulus by the Lula government ahead of the October elections, we do not expect the Central Bank, which continues to warn of upside risks, to act decisively on interest rates.”
High real rates remain the main structural obstacle to multiple expansion because they keep the cost of capital elevated, Luescher said. Domestic investors therefore remain underweight equities as redemptions continue and other asset classes offer more attractive returns.
Global competition
Costa-Bulthuis also pointed to portfolio reallocations toward markets with stronger earnings and growth dynamics as a headwind for Brazil.
“There are opportunities across Asia and, in developed markets such as the U.S., Europe and Japan, we are seeing rising yields and positive earnings growth. Brazil therefore faces both a domestic risk-premium adjustment and tougher competition for global capital.”
Corporate earnings in South Korea and Taiwan remain particularly strong, supported by continued investment in artificial intelligence, semiconductors and hardware. Vontobel believes the technology cycle will prove stronger and more durable than the market currently expects.
“For that reason, we see little potential for a rotation in the near term,” Luescher said.
*By Maria Fernanda Salinet and Bruna Furlani, Valor — São Paulo
Source: Valor International
https://valorinternational.globo.com/