The foreign investors have already brought almost R$80 billion to the Brazilian stock market this year, including purchases on the spot market, futures and stock offerings. In less than three months, Brazilian stock exchange B3 has already attracted 57% of the volume that came in last year. In the face of the Russia-Ukraine conflict, Brazil and other Latin American countries have benefited from the connection to commodities and the rotation of portfolios, from growth stocks to value stocks.
The question is how long this movement will last. There are those who consider that there is still a flow to arrive, since Brazilian assets are cheap in dollars. Others think that the new money won’t go that far because there are elections in Brazil, an unresolved fiscal and interest rate hikes in developed economies.
“Money looks for two things: growth differential and interest, where there is more interest. Ideally, if the region has a positive interest rate differential and also growth, at the margin, it will attract more capital. What the country experienced recently that performed so well was the fact of having depreciated prices. Brazil suffered before with a very devalued currency in relation to comparable peers and had no interest or growth. Press the forward button and the nominal interest rate is adjusted, but not growth,” says Marcelo Santucci, partner and head of international portfolios at BTG Pactual.
“Some of the money came from depreciation and interest rates, what is lacking is structural growth, reforms, there is the challenge of fiscal adjustment and uncertainty with the elections. To have the real big money, you need the structural. That’s one last unknown.”
For Mr. Santucci, this recent movement of foreign flow does not seem to be lasting. Despite the recent international setback, he believes that the diversification of currencies and regions remains a valid strategy for the Brazilians to smooth out periods of high tension as seen in global markets.
Long before the escalation of the war in Eastern Europe, there was already a reallocation of assets in global portfolios that to some extent accompanied the rise in U.S. Treasuries futures, says Leonardo Morales, partner at SVN Gestão de Recursos.
With the rise in long rates, investors reduced their exposure to growth companies, mainly in the technology sector, with more stretched multiples, and went to assets more linked to the commodity chain and banks, which had more attractive prices, segments considered value stocks in the traditional economy. “When you look at the Ibovespa, 60% is made up of commodities and banks. In this rotation, Brazil was favored, as well as all of Latin America: Peru, Colombia, Chile, all had an appreciation, and their currencies, too.”
Mr. Morales says that Brazil has lost a lot of weight in international indices in recent years and any increase brings a strong inflow of capital to the country. He also recalls that Russia usually has a similar participation in the benchmarks of emerging exchanges, but sales there didn’t even happen because the Russian stock market has been paralyzed since the invasion of Ukraine. “There is always a ‘smart money’ that must have sold before and bought Brazil and Latin America.”
It was a money flow that ended up giving outlets to equity managers and local multimarkets that continue to take redemptions, he adds.
A diagnosis of how long this movement will extend over time is, however, the “$1 billion question”, says Mr. Morales. His perception is that it will continue at least until the end of the quarter, in the face of inflationary pressures and commodity prices aggravated by the military confrontation between Russia and Ukraine, benefiting raw material manufacturers. “These are companies that are generating cash, without debt, the rotation from growth to value has room to continue.”
The intensity of the inflow of resources in these first months of the year in Brazil was really surprising, but it is basically explained by the fact that the domestic market is supported by commodity exporters. The global investor makes this association here and with other economies in the region, says Marcelo Arnosti, chief strategist for equities, multimarkets and offshore assets at BB DTVM.
He observes that most companies listed on the local stock exchange are evaluated as being of value, in which the expected return on invested capital is not in the very long term as in growth companies. “The [American index] S&P500 and the Asian one are more recognized as ‘growth’ by the weight of tech companies,” he says. “Asia lost part of its flow to Latin America and Brazil, which explains why the stock market is resistant and the real has been appreciating.”
For Mr. Arnosti, this movement is difficult to fully anticipate, but the rotation should continue, even if the dynamics more directly related to commodities falls.
Looking ahead, this inflow of funds will not necessarily be replicated in the next three, four months, says Marcus Vinícius Gonçalves, Franklin Templeton’s president in Brazil. “Things can go a different way. It does not mean that we have a negative reading, the reading is positive, there will still be flow, but the electoral uncertainty will weigh,” he says. “Brazil is stupidly cheap, the Brazilian stock market is cheap. It could be a very good year for allocators here and abroad.”
Some sectors of the Brazilian stock market were reasonably discounted. The war only accentuated this perception for the commodities segment, says Daniel Celano, head of third-party resources management at Schroders in Brazil. “But we see it as a very one-off thing. For foreigners, in fact, to place Brazil on the list of long-term investments, they need to see growth and GDP, for now, is uncertain.”
For him, the Brazilian exchange rate was closer to the fundamentals, given the good numbers of the external accounts, but he does not see the currency much lower than around R$5 per dollar.
He claims that inflationary concerns remain a global phenomenon, a side effect of the pandemic that ended up being amended by the military conflict in Ukraine. In Brazil, inflationary uncertainties, with growth, elections and the fiscal framework tend to take off the drive from the flow that has been observed.
Source: Valor International