Investment funds participation in business drops to 23.7% from 35% in 2019

01/16/2023

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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

“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/