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Foreign investors cut bets against the real by $19.3bn

Long dollar positions against the Brazilian currency in the derivatives market drop to $58.3 billion from $77.6 billion

01/29/2025

Foreign investors have reduced their bets on a stronger dollar against the Brazilian real by $19.3 billion in the derivatives market since the peak of these positions, reached in the first days of the Central Bank’s intervention in the spot market on December 16, 2024.

Several factors have contributed to this sharp reduction over the past 40 days. In addition to the monetary authority’s intervention, currency fund managers cited a more measured stance from U.S. President Donald Trump on trade tariffs, expectations of a higher Selic benchmark rate, and the lack of new fiscal developments in Brazil.

Between December 16 and the latest data released by B3 stock exchange on Monday (27), net long dollar positions fell from $77.6 billion to $58.3 billion, according to figures covering mini-dollar contracts, dollar futures, swaps, and foreign exchange coupon contracts (DDI).

A long position in the dollar reflects both current market movements and future expectations. The unwinding of futures market positions helps explain the recent depreciation of the dollar, as the Brazilian futures market has greater liquidity than the spot market. It also signals that fewer investors are willing to hold dollars for future exchange, possibly anticipating a further decline in the U.S. currency against the real or seeing limited upside potential for the dollar. Over the period of this position reduction, the exchange rate per U.S. dollar in the spot market fell from R$6.09 to R$5.91, marking a 3% depreciation of the U.S. currency against the real.

Dollar sell-off

For Ronny Kim Woo, a multi-asset manager at ARX Investimentos, the unwinding of dollar positions is closely linked to international developments.

“It’s important to look back at the last quarter of last year. In October, as betting markets increased the odds of a Trump victory, investors began positioning for a Trump trade—buying the dollar against all currencies, not just in developed markets but especially in emerging markets,” he explained.

In October, as Mr. Trump’s chances of winning the White House grew—along with expectations of a Republican majority in both houses of Congress—the exchange rate per dollar appreciated 6.14%, climbing from around R$5.44 to R$5.78. Over the same period, the DXY index, which tracks the dollar against a basket of major currencies, gained 3.1%.

“The market started pricing in the election outcome ahead of time. Around the same time, expectations for Federal Reserve rate cuts also began to shift,” Mr. Woo noted.

Domestically, a weak fiscal package announcement in late November, coupled with the government’s proposal to exempt income tax on salaries up to R$5,000, led foreign investors to increase their dollar positions against the real.

Until mid-November, after Mr. Trump’s election victory, the real had been one of the best-performing currencies against the dollar. Market participants had anticipated that the government’s fiscal package might support the Brazilian currency, prompting investors to avoid shorting the real. Additionally, there was an expectation that Mr. Trump’s policies would only indirectly affect Brazil. However, this view shifted after details of the fiscal measures emerged, leading to a sharp deterioration in the real’s performance, according to Mr. Woo of ARX.

Turning point

By mid-December, as long dollar positions began to unwind, Brazil’s Central Bank tightened monetary policy, signaling two additional 100 basis-point hikes in the Selic rate in upcoming meetings—a highly conservative stance. Around the same time, the Central Bank began intervening directly in the spot market.

“With this intervention [which drove the dollar lower], foreign investors saw an opportunity to lock in profits from the positions they had built since October,” Mr. Woo.

Hedging strategies also played a role. Investors with long dollar futures positions incur the Selic rate while earning the foreign exchange coupon rate. In December, two factors made these positions less appealing: the Central Bank raised the Selic rate and signaled further hikes, while its interventions in the spot and swap markets pushed down the foreign exchange coupon rate.

As a result, holding long dollar positions became more expensive. While these factors alone may not fully explain the unwinding of positions, traders say that, combined with profit-taking and a calmer global outlook, they became a reason for caution.

“Betting structurally against the real right now is risky and could be very costly. The widening interest rate differential [between Brazil and the U.S.] undermines this strategy over the long run,” said Rodrigo Cabraitz, a currency trader at Principal Claritas.

He expects that future bets against the real will be more tactical, with shorter stop-loss levels to limit downside risk.

“To take a long-term bearish stance against the real, we would need more negative domestic news. So far, we’ve had a quiet month with no major developments impacting the market,” he added.

Mr. Cabraitz also noted that the first quarter typically sees a seasonal inflow of dollars into Brazil due to grain exports, which could provide additional support for the real.

“This marginally positive inflow scenario, combined with the interest rate differential, discourages long dollar positions. Unless new negative news emerges, the fundamentals of the real make it harder to bet against the Brazilian currency,” he explained.

Another factor driving the shift in dollar positions is the preference for relative trades among emerging market currencies.

“If we look at the most liquid currencies in the region—the Brazilian real, Mexican peso, Chilean peso, and Colombian peso—the real stands out, ” Mr. Cabraitz said.

“With low volatility due to a lack of fresh local developments and external factors weighing more heavily on peer markets”, the real is positioned to outperform other Latin American currencies, he added.

*By Arthur Cagliari  — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Foreign investors record largest stock market outflow since 2020

Institutional investors follow suit, ending the year with net withdrawals on the secondary market

01/06/2025

The turbulence triggered by the government’s unveiling of weaker-than-expected fiscal measures, anticipation of aggressive protectionist policies from Donald Trump, and rising Selic rates kept foreign investors at bay from Brazil’s stock market throughout 2024.

Data from B3, the Brazilian stock exchange, reveals that foreign investors pulled R$32.1 billion from the secondary market (trading of already-listed shares) last year. This marked the largest annual outflow since 2020, the first year of the pandemic, when the segment saw a R$40.1 billion deficit, according to a Valor Data analysis. The figures exclude IPOs and public offerings.

Institutional investors also ended 2024 with net withdrawals, recording a R$37.5 billion deficit in the secondary market. By contrast, only individual investors finished the year with a positive balance, contributing R$30.8 billion.

Michel Frankfurt, head of Scotiabank’s brokerage in Brazil, casts doubt on the prospect of significant foreign inflows in the near term. “We won’t see substantial flows. There might be some activity to capitalize on stock market bargains, but we lack a strong ‘narrative’ to create momentum. It’ll just be a ripple,” he explained.

Mr. Frankfurt added that Brazil appears to have been “abandoned” by global investors, hindered by its failure to differentiate itself on the global stage and internal woes like worsening government accounts and disappointment over the spending cut package.

HSBC analysts echoed this sentiment, expressing concern over the vicious cycle stemming from fiscal policy frustrations. Last week, they downgraded their recommendation for Brazilian equities from neutral to “underweight,” citing growing pessimism about the country’s outlook.

“Brazil fits the profile of a ‘classic value trap,’” wrote analysts Alastair Pinder, Nicole Inui, and Herald van der Linde in their report.

While acknowledging that Brazilian equities are currently undervalued—trading at a projected 12-month price-to-earnings ratio of 6.6 times—they argue that asset revaluation is “unlikely” until the Selic benchmark interest rate falls or fixed-income returns decrease, a shift they do not anticipate before the second half of 2025.

*By Bruno Furlani

Source: Valor International

https://valorinternational.globo.com/
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Foreign investors take larger share in M&A in Brazil

Local investors expected to gain ground in 2024 amid capital market reaction

02/16/2024

Daniel Wainstein — Foto: Carol Carquejeiro/Valor

Daniel Wainstein — Foto: Carol Carquejeiro/Valor

The share of foreign capital in mergers and acquisitions (M&A) in Brazil increased last year, reaching the highest percentage in at least seven years.

In 2023, cross-border transactions accounted for 50.1% of a total of 371 operations, according to a survey carried out by Seneca Evercore for Valor. In the second half of the year alone, the share was 54.5%—out of a total of 156 operations—the highest half-yearly proportion since 2016. According to the study, since 2014 there have been 5,061 M&A deals in Brazil, 47% of which involved foreign buyers.

Investment bankers point out that the larger share reflects an improvement in Brazil’s risk perception, especially when compared to its emerging peers, which has also resulted in a greater number of mandates in the first weeks this year.

The trend should continue in 2024, although Brazilian buyers are also expected to show more strength this year, driven by a more functional capital market and the return of initial public offerings.

“We believe that, based on what we observe in the market and our own pipeline, the first half of 2024 will be even stronger than the last half of 2023 and should reveal even greater predominance of international investors,” said Daniel Wainstein, a partner at Seneca Evercore.

According to the executive, the increased participation of foreigners in M&A deals in the country is a consequence of the improvement in Brazil’s risk perception after the fall seen last year. “That is combined with a relatively low unemployment rate, inflation under control so far, a decrease in Brazilian interest rates and a downward trend in the U.S. likewise, and Ibovespa [Brazil’s benchmark stock index] at record highs,” he notes.

According to Dealogic, a consultancy that tracks financial market data worldwide, the same trend is observed in an analysis by financial volume. Last year, of a total of $37.9 billion in transactions, $17.8 billion came from cross-border operations, or some 47%, the largest share over the recent years.

The strength observed last year was driven by large-scale operations, such as the sale of shares of Vale’s base-metals unit, AESOP, and The Body Shop, the last two carried out by Natura as part of its business restructuring. In all three cases, the operations occurred largely abroad, but are included in the local M&A volume as they involve domestic companies.

The same trend has been observed in the investment bank sector, with foreign investors actively seeking assets in Brazil. “At the beginning of the year, we saw foreign investors interested in learning about transactions in Brazil, including the Arab and Chinese. But we have mandates at both ends, not only from foreigners wanting to invest in Brazil, but also from foreign companies leaving the country due to strategic decision,” said Leonardo Cabral, head of Santander’s investment bank in Brazil.

Fabio Medeiros, the head of Morgan Stanley’s investment bank in the country, points out that the participation of foreign investors last year is even clearer in transactions worth more than $100 million. In this section, 70% of the total were cross-border transactions. “It is the highest number since official records began, and the same as in 2016,” he said. According to the executive, that can be explained by Brazil’s attractiveness compared to its emerging peers. “Each country has its own challenges. We have our own, but they don’t scare foreigners so much.”

For this year, Mr. Medeiros believes that local transactions will gain traction again and will share the M&A pie with the foreign capital. Such expectation is also based on the forecast of improvement in the capital market in Brazil, with the expected return of IPOs in the local market. IPOs help fuel companies’ cash, boosting their interest in acquisitions.

Diogo Aragão, Brazil head of M&A at Bank of America, says the capital market is more functional this year, not only for equity, but also for local and international debt, which helps take operations off the drawing board. “The scenario has made companies feel more comfortable in starting a transaction,” he notes. According to him, new transactions are arriving at the negotiation table, while others, previously on hold, are taking up again.

“When you look abroad, Brazil is well positioned. Falling interest rates and stability in the exchange rate and in the political scenario create conditions for investors to take the country more seriously,” the BofA executive said.

Roderick Greenlees, global head of investment banking at Itaú BBA, says that, in general, operations involving foreign capital are large and have a long-term horizon. According to him, several conversations are underway, with new mandates at the beginning of the year, including the participation of foreign investors.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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