The macroeconomic challenges and uncertainties brought by the presidential elections this year have not prevented the arrival of a substantial amount of funds from foreign investors in the Brazilian stock market, which has ensured positive returns for the Ibovespa in 2022, unlike the New York markets. By January 21, the net inflow of foreign funds into the B3 secondary market had reached R$20.1 billion, the highest since January of last year, when inflows totaled R$23.6 billion.
Representatives of foreign firms told Valor, however, that they don’t see better fundamentals here and that external factors, including the monetary tightening led by the U.S. Federal Reserve and more optimistic prospects for commodities, explain the flow. Those factors, they say, have increased global demand for assets in emerging countries.
The dynamics has been helping Ibovespa to outperform peers from developed markets. While Brazil’s benchmark stock index rose 5.13% in 2022, the S&P 500 fell 8.6%.
Juliano Arruda, head of Latin American equities at Goldman Sachs, said that last year the global equity funds raised about $950 billion – an unprecedented amount – and Brazil ended up benefiting. This year, equity funds are still raising funds and, by mid-January there were about $67 billion of inflows in products of this type around the world.
“The difference is that, with the repricing of interest rates in the U.S. driven by a more hawkish Federal Reserve, there is an outflow of resources from the United States and record flows to emerging markets,” Mr. Arruda said.
Another factor expanding the demand for emerging market stocks, especially Latin American, is the favorable wind for commodities in 2022. While the main oil benchmarks are up more than 10% for the year, iron ore sees gains of the same magnitude.
“About $15 billion has flowed into emerging markets in the last three weeks, roughly in a distribution of 80% to equities and 20% to debt. Latin American equity markets have done especially well – probably in the wake of the strong start to the year for commodities, as well as signs that China is ready to start boosting its economy after resetting its strategy last year,” said Chris Turner and Francesco Pesole, strategists at ING.
According to David Beker, head of Brazil and Latin America Economics at Bank of America, there is greater optimism about the growth of China today and this benefits companies related to the dynamics of the Asian country, especially Vale. The mining company – which have a weight of nearly 15% in Ibovespa – is up 7.8% in 2022.
“The more attractive price levels we saw at the end of the year, the weakened real and less political noise probably also helped,” Mr. Beker said.
In the view of Esteban Polidura, head of products for the Americas at Julius Baer, there is a gradual rotation from growth – share classes that have high future growth prospects built into their prices, typically found in the technology sector – to value companies, which have cheaper multiples and are typically from the financial and basic materials sectors.
This is because, he said, higher interest rates tend to impact growth stocks more than any other type of stock. “I would link the flow precisely to a global shift to value stocks and Brazil is a good example of a market that is now perceived as value. However, we need to wait to see whether this will be lasting or not. It will depend a lot on Fed signals, and one must also monitor how the global appetite for risk will be,” he said. Still, according to Mr. Polidura, it is key to follow the elections in Brazil, which are likely to increase the volatility of local assets.
For Mr. Beker, with BofA, it will be difficult for the Ibovespa or the emerging markets to continue to see a better performance than the developed markets as interest rates go up in the U.S. “On the other hand, this rise in the basic materials and energy sectors may continue to benefit us, as we saw at the beginning of the year,” he said.
From the local standpoint, nothing justifies a great improvement in local fundamentals, said Mr. Arruda, from Goldman Sachs. “This will only change when we have more visibility regarding the elections,” he said.
He also mentions the possibility of this flow reversing course. As the United States face tightened financial conditions, including falling stock markets and rising interest rates, at some point the Federal Reserve could signal a pause in the monetary tightening cycle. “The flow from growth to value and from developed to emerging can be reversed if the Fed slows down the pace,” he said.
Robert Davy, emerging markets fund manager at Schroders, has a more constructive view regarding the local market, based on the perspective that the monetary tightening cycle started early in Brazil, which can be advantageous for local risk assets.
“In 2021, the country suffered with inflation and the consequent cycle of high interest rates. In 2022, the rest of the world will look at the same issues, while Brazil has already started this process. So, we may still have, this year, inflation falling and a reversal of interest rates, which would put Brazil in a great position,” he said.
The view is similar to that of Emy Shayo Cherman, J.P. Morgan’s strategist for Latin America and Brazil. According to her, the country seems to be well advanced in the monetary tightening cycle, which means an advantage relative to other emerging economies.
“In principle, this flow is likely to continue. The multiples of the shares have risen in recent days, but are still quite discounted and we have the impression that the downward revision of profits has also begun to stabilize,” she said.
According to her, the earnings season ahead will be very important to define how sustainable is this foreign flow. “I think that on the macroeconomic side, nobody expects big improvements; the expectation here is just that the peak of inflation is behind us,” the strategist said.
Mr. Davy, with Schroders, said he is not too scared about the upcoming presidential election. He says the polls have given clear indications of who the new president will be, and it remains for the market to wait and see how the new government will build its policies.
“I was already working with emerging markets in 2002, when Lula first won,” he said, citing former president Luiz Inácio Lula da Silva (2003-2010), which is a presidential candidate again this year and is ahead in the polls. “We were tense and some local analysts calmed us down, saying that his administration would be better than expected.” He added: “The result seems clear now. We just need to understand what will happen with the state-owned companies, the country’s fiscal policy, the dynamics between [Brazilian Development Bank] BNDES and private-sector banks.”
Frederico Sampaio, chief investment officer of equities at Franklin Templeton in Brazil, also says that foreign investments are not explained by an improvement in the fundamentals of national assets. For him, the flow is a direct consequence of the low prices of local stocks, a move that was driven by withdrawals from investment funds since the end of last year.
“When the Selic was at 2% a year, even hedge funds focused their funds on the stock market. Now we are seeing the reversal of this, often forced by investor withdrawal. It is a brutal change that does not speak to the fundamentals of the companies. The macro has even changed, but there was not such a big revision in the companies’ results to justify this”, he says.
He cites the example of digital retail and technology stocks so cheap that managed to rise this year in sessions in which interest rates were advancing strongly. Despite higher interest rates and some disappointing results, the devaluation of these stocks was so “bizarre” that it opened space for “less obvious” trading moves, he said.
From here on out, however, Brazil depends on Brazil, Mr. Sampaio said. “Moves out there have impacts here, but the long term depends more on what is done at the local level. The country and the market need a positive growth perspective, and the problem is that, again, we haven’t managed to put in place the necessary structural changes to get to this point,” he said.
Source: Valor international