Flow of foreign capital to Brazil will continue, Goldman says

The flow of foreign capital to Brazil will be sustained in the medium term and there will be a new phase of investments towards fixed income assets, said Ricardo Mora, a partner and co-head of Latin America at Goldman Sachs. The American executive of Mexican descent spoke to Valor while in Brazil, his first interview with a local news outlet. Among his functions as the chief executive of the bank in the region, Mr. Mora oversees the executive committee formed by the five co-CEOs of the Brazilian operation.

With more than 30 years of experience in emerging markets, Mr. Mora sees the flow of foreign investment associated with the monetary tightening carried out by the Central Bank as anchors for the Brazilian currency. “When you have tighter monetary conditions, which allow for the interest rate differential to provide the anchor for the currency, you have portfolio flows that will continue to come into this country,” he said.

The current flow of funds has been “mostly geared towards equity,” the executive said, who believes there will be a new phase of this capital inflow directed to fixed income, which “will anchor the [Brazilian] currency.”

Read the main excerpts from the interview below.

Valor: We see a strong inflow of funds from abroad to the stock exchange. Is Brazil cheap for foreign capital?

Ricardo Mora: When you look at the broader environment or what’s going on in the markets, the perception of cheap can vary. And when you look at currency fluctuations in association with valuations, then what’s perceived to be expensive could be cheaper, from the dollar perspective. And so what’s happened in terms of Brazil specifically is we’ve had from our estimates, there’s been roughly about R$86 billion of foreign inflows. And that’s been mainly geared towards the equity markets. And so you’ve seen the commensurate appreciation of the foreign exchange [rate]. And so roughly R$80 billion have been equities. The remainder have been directed to fixed income, as a result of the CDI [Brazil’s interbank benchmark rate] being higher. From the equity portfolio flows that we’ve seen all these have been in the secondary market, mainly into the commodity space, banks and index. But we have not seen the money come into institutions that serve the local population, in the retail space. We haven’t seen it [inflows], for example, in fields that you would think would be more consumer led, it’s really been more focused on commodities and banks.

Valor: Is this inflow sustainable in the medium term?

Mr. Mora: It’s a good question. The economic engine in Brazil is strong. There will be continued inflows into Brazil, it’s not a matter of whether there’ll be some fits and starts in terms of valuations versus other countries. But in terms of how foreign investors see the country and its economic might, it’s very clear that you can see it in many different avenues. We have just discussed fixed income and equities, but we also look at foreign direct investment. And, through our global network, we’re in touch with sovereign wealth funds, high net worth individuals, family offices, and all have intentions to invest in Brazil.

Valor: About the Brazilian real, do you see the exchange rate back into the fundamentals?

Mr. Mora: From the perspective of Goldman Sachs, there was an overshooting of the currency in terms of depreciation. What we’re doing is more reverting back to the mean. More importantly, the inflows have helped, certainly, but the policies help as well. When you have tighter monetary conditions, which allow for the interest rate differential to provide the anchor for the currency, you have portfolio flows that will continue to come into this country now. So far, as we discuss, it’s been mostly geared towards equity, and I think the next leg will be fixed income flows. And a stable currency in the backdrop of a robust economy will then allow for continued fixed income flows. That will be the next leg, which then will anchor the currency.

Valor: Do you see the exchange rate below R$5 to the dollar after the elections, in October?

Mr. Mora: I wouldn’t be surprised if we go below that. And it’s a function of the sustainability [of debt]. And that will come down to government policy, fiscal, in the backdrop of what’s happening with the continued drop of inflation as a result of the Central Bank’s hikes. And so in that backdrop, you don’t have for example an overheating economy. There is a certain slack in the economy that will allow it to grow. And so in that backdrop, now, this comes down to the ability for continued growth. And that depends again on fiscal policy and a well-anchored currency.

Valor: Is there a risk of reversal of the inflow to the emerging markets if the Fed hikes interest rates more aggressively?

Mr. Mora: In terms of foreign inflows and broader markets, it’s difficult to gauge where capital flow will go. One thing is certain: in the backdrop of market volatility, investors tend to be less risk averse and to look for value. And they tend to look for assets where there’s strong underlying enterprise value. It’s already well known that there will be at least seven rate hikes in the U.S. If you look at the FCI [financial conditions index], it’s already tightened quite substantially, and the market has been pricing these tighter monetary conditions. From a valuation perspective, you can argue that Brazil is fundamentally strong in value. That’s why we’ve seen these commensurate flows.

Valor: Brazil started raising rates before the Fed. Can this help cushion the impact of interest rate hikes in the United States?

Mr. Mora: The Brazilian central bank was one of the first to move. And they were very early to the recognition that the word “transitory” was a bit of a difficult concept to describe the condition [of inflation] given the backdrop of rising prices. The Brazilian central bank has been quite aggressive and not just moving in small increments of 25 basis points. One sees they are very serious about [monetary] policy. In that backdrop, you’ve seen the currency react. This year, it’s been the combination of central bank policy and foreign inflows. And the Central Bank reacted appropriately. It’s widely recognized that this Central Bank had to react to what was happening on the ground with Covid. And when there was a recognition that inflationary pressures were building, again, reacted very quickly. When you look at the broader emerging markets, there have been certain countries that have been resistant to move as actively as the Brazilian central bank. And that’ll bode very well, in terms of future policy and the ability for foreign investors to know that the central bank and its policy will be reactive [against inflation] as needed, that there’s an independence of the central bank, that they will do what’s right.

Valor: Will the war in Ukraine affect the flow to Brazil?

Mr. Mora: When you look at emerging markets, it used to trade as a beta of one, meaning that if you had a problem in one market, it would affect the others. And now, what you have is a more of a focused view, in terms of recognizing that risks can be isolated, and that portfolio and capital flows will be affected in specific manners. The market now sees that there’s actually very independent and very specific regional differences between these countries and policies. In Brazil, for example, we did see certain portfolio flows leaving Eastern Europe, including Russia, and flowing into Latin America, specifically into Brazil. And so from that perspective, there was some shift in the portfolio flows more geared towards equities as you’ve had these tremendous growth and valuations in developed countries, specifically in the U.S. Of course, most of the capital that has been directed to the U.S. has done very well. It’s hard to take that money away from that performance, and spin it into another jurisdiction. That said, as the macro backdrop has become a bit more challenging in developed markets, we’ve seen these portfolio flows. Brazil, specifically, has very attractive valuations, and it also has the right components of what the world needs, like commodities. In that backdrop, it seems to me very clear that there’ll be continued interest in terms of portfolio flows, either in the private markets or as outright cross border flows.

Valor: Does Goldman see the sustainability-linked bonds as an opportunity in Brazil?

Mr. Mora: We have seen many new, modern operations in Brazil and we see many opportunities in the sustainable bond market. There are new concepts, like carbon credits, debt for nature swaps, the concept of being able to monetize what is already in Brazil in terms of [conserved] nature, for example, the ability to have carbon capture associated with Brazil’s [environmental actions]. Goldman has had a tremendous focus in terms of being able to help our clients that have access to these resources and to monetize them. I think you’re going to continue to see very innovative products around this space. That’s a very good thing in terms of outlook, because monetization means more preservation.

Valor: What are Goldman’s plans for Brazil and Latin America?

Mr. Mora: In Latin America, I would say that in the last two years we’ve had successive record years in the region across divisions. When you look at Latin America, Brazil is core to our focus in terms of our aspirations for the region. And when I specifically look at what’s happening here, and what we’d like to do, one is clearly investing in our people. There’s been a number of initiatives taking place here. For example, we’ve been very active in our hiring in the tech space. We hired 40 engineers last year, and our intention is to hire another 20 this year. Under the Brazil Management Committee, we’ve been able to progress our plans in Brazil.

Source: Valor International

https://valorinternational.globo.com