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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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Brazilian stock market remains attractive amid global volatility

For UBS, local market may outperform other emerging markets in coming months

09/26/2022

The Brazilian stock market will not remain immune to the instability that the rise in interest rates in the United States causes in global markets, but it is expected to continue to show a better performance than its peers in the coming months.

In UBS Wealth Management’s view, the securities prices – below the historical average and incompatible with the fundamentals –, the less vulnerability to the global liquidity reduction, and the high dividend yields are likely to help that, compared to other emerging markets, Brazil remains more attractive in the next 12 to 18 months.

For Ronaldo Patah, investment strategist with UBS Wealth Management in Brazil, the uncertainties coming from the monetary tightening cycle conducted by the Federal Reserve prevent a clear trend to be pointed out for the stock market. The scenario suggests a lot of instability since the interest rate hike is not over and asset prices have not been fully adjusted. “I don’t see an unequivocal upward trend in the stock market, but even on bad days, Brazil tends to perform better,” he says. “Brazil has advantages in terms of fundamentals at the moment, such as GDP performance and the level of interest rates.”

Mr. Patah recalls that after years at the bottom of the league, the Brazilian stock market has recovered, and this year has the best performance among the emerging economies. The MSCI Brazil index rose 5.72%, compared to a 26% drop in the MSCI for emerging markets. But, despite that, the reading is that the stock discount remains high: UBS estimates that the Brazilian stock market today trades at a 43% discount compared to the group of emerging markets. When looking at the price-to-earnings ratio (which takes into account the projection for companies’ profits over the next 12 months), the multiple is at 6 times, 2.5 standard deviations below the average of the last ten years.

The Brazilian stock market could also benefit from commodity prices, which are expected to remain high. This scenario helps because more than 38% of its market value comes from companies linked to the segment. High-interest rates help stocks in the financial sector. “Brazilian stocks are being traded at an average dividend yield of 10% to 12%, much better than what other exchanges offer,” he says.

This scenario of tighter local monetary policy and high commodity prices also benefits the exchange rate dynamics. According to Mr. Patah, with UBS, if the world goes through a “soft landing” (soft deceleration of the economy), the fair exchange rate in Brazil is R$5 to the dollar, despite the end of the monetary tightening cycle – which puts the perspective of a reduction of the Selic key rate at some point in the medium. “The resilience of Brazil’s foreign accounts can help the country navigate through a long period of a liquidity shortage,” says UBS.

According to Mr. Patah, there may be a flow of external resources to the stock market after the election. “It is difficult to predict, but the fact is that the global market is still very liquid,” he says.

He says that today, the market has “priced in” the victory of former President Luiz Inácio Lula da Silva (Workers’ Party, PT), and no major change is expected in terms of economic policy. “But it’s still an uncertainty, which means it’s possible that after the two rounds of votes, there will be a change in the prices of the stock market and the exchange rate.”

For Anand Kishore, equity manager with Daycoval Asset, despite the strong volatility expected at least until the end of the year, local assets are ahead of their peers in terms of attractiveness. With this, there are two risks to be monitored in the face of the Fed’s monetary tightening cycle: revisions in the earnings of listed companies with the expected slowdown in global activity and the growth of discount rates in all asset classes.

“If the world’s largest economy slows down, there are global consequences in terms of growth and Ibovespa suffers indirectly from this. There will be earnings revision all over the world and here too, on a smaller scale. Moreover, with the Fed Funds going up, the discount rate gets higher for all assets. But when the U.S. interest rate starts to impact inflation, the domestic monetary tightening will be done. So, even if all markets fall, the local one tends to fall less,” he says.

Mr. Kishore sees more room for assets linked to the domestic economy and banks to advance next year, given the discounted multiples, the end of the interest rate hike, and the resilience of activity. Regarding commodities, and despite seeing support at current levels, the uncertainties in China may weigh on Vale, while Petrobras may have difficulties advancing in case of Mr. Lula da Silva’s victory. The bank projects Ibovespa will reach 150,000 points by the end of 2023.

Santander, in turn, projects Ibovespa at 140,000 points. According to the report signed by analyst Aline Cardoso, the market may price cuts in interest rates earlier than expected, reflecting the drop in inflation. The bank also affirms that there is a 70% probability of a soft landing for Brazil, against 30% of a hard landing (deceleration with a greater chance of recession). Globally, the chances of a hard landing are 40%, against 30% of a soft landing and 30% of stagflation.

Even with the largely positive relative vision among market agents, Fernando Bresciani, investment analyst at Andbank Brazil, gives a warning. “The stock market is a reflection of the external markets. Nothing guarantees, and it seems unlikely, that foreign investors will buy Brazil while the other markets melt down. Besides this, as of the second half of next year, the measures of the new government will take effect. It depends a lot on what is going to be done,” he says.

“But the local activity and environment are better at the moment, the earnings season is expected to be good and with positive guidance, companies are more deleveraged. The moment is positive.”

*By Lucinda Pinto, Matheus Prado — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Foreign capital brings R$80bn to Brazilian stock market

1000+ Stock Exchange Pictures | Download Free Images on Unsplash

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

https://valorinternational.globo.com

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