More dismayed than optimistic tone marked conversations between companies, banks, and funds at a series of events in New York

05/22/2024

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Flavio Souza — Foto: Silvia Costanti/Valor

Foreign investors are putting Brazil on hold for now. In addition to local and global macroeconomic issues, the country has its own homework to do to avoid losing this capital flow for a long time—or the money will be reallocated to emerging markets like India and Mexico. This was the overall tone, more dismayed than optimistic, of the conversations between companies, banks, and global institutional investors throughout the last week, during an extensive Brazilian agenda in New York.

“The companies are wrapping up the first-quarter earnings cycle with results in line with expectations, but on the investor side, we notice a wait-and-see attitude due to issues related to Brazil or issues beyond Brazil. Naturally, the interest rate environment in the United States is significant, as well as the recent revisions regarding the behavior of interest rates in the Brazilian market,” summarizes Flavio Souza, CEO of Itaú BBA.

The bank brought together 150 businesspeople and 500 investors for four days of debates. According to the BBA’s leader, there was a change in tone compared to last year, when there was a challenging scenario with a new government and credit events, but with a perspective of good opportunities ahead. Now, investors looking for liquid assets have shown more nervous behavior, without reallocating the capital they are withdrawing from local assets.

“There is still a lot of noise in Brazil on the fiscal side,” said Sergio Fischer, CEO of LOG, a logistics company controlled by the Menin family, after rounds of talks with foreigners. In April, the federal government included a revision of the fiscal target for 2025 in the Budget Guidelines Act, projecting a result lower than initially discussed.

For Fabio Barbosa, CEO of Natura, the transition at the Central Bank also contributes to the tension among foreign investors. Roberto Campos Neto will leave the presidency of the monetary authority at the turn of the year and, in the last meeting of the Monetary Policy Committee (COPOM), the board showed a split between directors appointed by the Lula administration and those remaining from the Bolsonaro administration, raising doubts about inflation tolerance in the next cycle.

“What disappoints me the most is seeing that Brazil is not on the map, not in the focus of investors. There is a lot of concern about the uncertainties we have, such as the fiscal issue, greater or lesser interference in the economy, what will be the trend of interest rates, and the flexibility of the Central Bank,” said Mr. Barbosa.

In his view, these issues add to the fact that Brazil is poorly positioned globally. “As interest rates in the United States are very high, the risk appetite has decreased, and Brazil today represents a risk. This disappoints me because we are better than the image that appears, better in environmental issues, economic growth. The country will grow around 2.5%, has inflation under control, institutions functioning reasonably, but that is not the perception we convey,” he said. “We convey the perception of uncertainty that some of these positive points may not be there in the future. And that makes us miss investment opportunities.”

It was precisely during the meetings promoted by Brazilian companies in the U.S. market that President Lula decided to finally replace the CEO of Petrobras, appointing Magda Chambriard, an executive with a more “expansionist” profile. The subject inevitably invaded the closed-door meetings. “Petrobras is Brazil’s largest company by market capitalization, so it is natural that it is always a focus of monitoring and attention. When there is a change in the command, and this was news all day, it becomes the subject of questions and inquiries by investors trying to understand the scenario,” said Mr. Souza from Itaú BBA. “It’s part of a broader context related to the perception of the level of government influence in the companies it participates in, the economy in general, and how this relates to fiscal, economic policy, and from the perspective of returns.”

According to him, for equity investors, this context influences more immediate behavior. However, some investors see an entry point in Brazilian stocks, as price-to-earnings multiples are below the historical average.

At Itaú, updated monetary projections now indicate the Selic policy rate closing the year at 10.25% per year. The bank still expects a window for initial public offerings in the fourth quarter but mainly counts on secondary offerings for stock market activity.

“Mexico is clearly much more active, and India is super strong as well. The country cannot stay out of the flow for too long; it has to more actively return to being a desirable place, capable of attracting foreign investors,” said Cristiano Guimarães, head of corporate and investment banking at Itaú BBA. “It is necessary to create some momentum, a perception that the market will move forward and unlock,” adds the institution’s CEO.

Mr. Souza emphasizes that strategic investors will continue to look at sectors such as energy, agriculture, and pulp and paper. The bank advised the sale of AES’s local subsidiary but does not see a trend in this case. “Infrastructure continues to attract investors; it is the market where project finance effectively works, with long-term capital for project development,” said Mr. Guimarães.

Sustainability and climate finance are also definitely on the bank’s, investors’, and companies’ long-term agenda—especially after the catastrophe in Rio Grande do Sul, which highlighted the urgency of the issue and the need to include this risk in business and public management models.

“There is more than objective evidence of climate change and its implications beyond the humanitarian issue, which is always the most relevant, but also in business. In our operation, we see this so clearly that the entire climate finance agenda of the Itaú Unibanco group, which has always been on the broader sustainability agenda, is now part of Itaú BBA’s activities because we understand that it has ceased to be a corporate citizenship agenda and has become a business agenda,” said Itaú BBA’s CEO.

One of the bank’s initiatives was a financing commitment of up to R$400 billion for sectors with a positive impact on ESG criteria by 2025. “We have already exceeded 90% and will reach the goal 18 months ahead of our ambition, so it will be updated.”

*Por Maria Luíza Filgueiras — New York

Source: Valor International

https://valorinternational.globo.com/