Foreign investors rush out of Brazilian equities
Foreigners have withdrawn from Brazilian equities at a record pace this year, amid persistent scepticism from global investors about the country’s economic recovery.
In total, foreign investors have pulled a net R$15.2bn (US$3.7bn) out of the country’s stock markets this year, data from the São Paulo stock exchange show.
The exchange has surged higher, with the benchmark Bovespa up more than 25 per cent this year. But the persistent withdrawals from foreign accounts show how heavily this rally depends on local investors.
“Foreign investors are looking for reality rather than rhetoric,” said Greg Konstantinidis, a portfolio manager at Fidelity International. “High unemployment and low capacity utilisation are signs of a weak economic growth backdrop.”
Aside from the crisis year of 2008, foreign investors have been strong net buyers of Brazilian stocks every year since figures were first collected in 2004. But net inflows drew to a halt last year and outflows accelerated throughout 2019. So far this month, foreign investors have reduced their stock holdings in Brazil by $578m.
In part, that is because Brazil offers large, liquid financial markets, which are sensitive to volatility elsewhere in the region, analysts said.
But foreign investors have also been spooked by stalling reform momentum after the passage of a landmark pension reform this year. Despite signs of economic growth returning after a deep recession in 2015 and 2016, unemployment is stuck at about 12 per cent and household debt is rising.
Some investors are also avoiding Brazil because of concerns over the country’s governance of its natural environment. Under president Jair Bolsonaro, loggers and farmers have stepped up development of the Amazon rainforest, a factor that has already led Nordea Asset Management to back away from investing in the country.
Investing within environmental metrics is “a huge business”, said Wilber Colmerauer, a Brazilian financial consultant in London. “You have a president who cannot stop talking about producing as much as we can as fast as we can. It’s completely out of sync.”
While locals appear to have kept faith in the new government’s liberal economic programme, foreigners are more sceptical. The São Paulo stock exchange data show that foreigners have been net sellers of Brazilian stocks since the election of the rightwing government in October 2018.
A regular survey by XP Investimentos, a local brokerage, of 81 fund managers, economists and consultants, most based outside of Brazil, suggests that support for the government on markets has decreased dramatically.
In January, 86 per cent of those surveyed rated the government as good or excellent, and 1 per cent as bad or terrible. By October, just 45 per cent rated the government as good or excellent, and a tenth described it as bad or terrible.
“The message the government is giving is very confusing,” said Mr Colmerauer. “This is a liberal government but it has some elements which are interventionist and extremely conservative.”
More broadly, however, the outlook for Brazil is upbeat. The economy expanded 0.6 per cent in the third quarter, spurring hopes of a cyclical recovery in Latin America’s largest country.
Most economists polled by the central bank this month expect gross domestic product to grow 1 per cent this year — picking up next year to above 2.2 per cent — with inflation at 3.4 per cent.
Policymakers are also focusing on a series of big economic reforms aimed at restoring confidence in the country’s fiscal position, such as overhauling Brazil’s Byzantine tax system.