While Brazilians Shun Stocks, Foreign Investors Ignore Recession

Updated on

Foreigners are piling into Brazilian stocks that local investors are avoiding.

It’s a new twist in Latin America’s largest economy, which has seen some of the biggest emerging-market booms and busts over the past decade and a half. Shares followed a sixfold surge from 2003 to 2010 with some of the world’s worst declines, dropping by more than 50 percent in dollar terms.

The country is once again luring global money managers -- and the benchmark Ibovespa is in a bull market -- after state-run oil producer Petroleo Brasileiro SA released earnings that had been delayed by a corruption probe, easing concerns about a sovereign rating downgrade. None of that has been enough for local investors witnessing first hand the rising unemployment and soaring inflation amid forecasts for the economy’s worst contraction in 25 years.

“A lot of people have been thinking ‘Is Brazil cheap enough? Have expectations gone too pessimistic short term?’” said Katherine Weber, the head of Latin America analysis at BMI Research in New York. “Local investors have been much more negative, even before the Petrobras scandal started. When you’re going through that, watching it unfold every day, it’s much more real. You feel the slowdown in growth.”

Retail investors have accounted for less than 15 percent of trading in the Brazilian exchange for the last eight months, ending 2014 with the lowest share since 1998, and foreigners have picked up the slack. Exchange data shows they were responsible for more than 51 percent of trading last year, the highest share since at least 1994.

Foreign Inflows

And they’re turning bullish. Foreign investors poured a net 7.6 billion reais ($2.5 billion) into Brazilian stocks in April, the most for any month since at least 2010. That’s pushed net foreign inflows this year to 17.5 billion reais, near the 20.3 billion reais net for all of 2014, according to data from the exchange.

“Brazil gets interesting when the market’s mood turns gloomy,” Gary Greenberg, who helps manage $1.9 billion as head of emerging markets at Hermes Investment Management Ltd. in London, said by telephone. “Brazil does have a tendency to bounce back.”

The Ibovespa entered a bull market on April 24, jumping more than 20 percent from this year’s low two days after Petrobras released audited results following a five-month delay. The surge in stocks came even as data last month showed industrial confidence dropped to a record low, unemployment rose to the highest in three years and the central bank boosted the benchmark interest rate for a fifth consecutive meeting.

The Ibovespa fell 0.3 percent Thursday in Sao Paulo.

Chinese Growth

Brazil, a commodities exporter and a country dependent on external financing, is “vulnerable” to Chinese growth concerns and the Federal Reserve’s rate decisions, Maarten-Jan Bakkum, a senior emerging-market strategist at NN Investment Partners in The Hague, said by phone.

The economic expansion in China, Brazil’s top trade partner, is threatening to dip below the leadership’s 2015 target of about 7 percent. The Fed has been weighing a rate increase after a long period of monetary stimulus that’s helped pace a rally in emerging-market assets.

“The outlook for Brazil continues to be pretty bad,” Bakkum said.

Analysts continue to reduce forecasts for Latin America’s largest economy. In a central bank weekly survey published Jan. 12, the projection was for growth of 0.4 percent this year and an expansion of 1.8 percent in 2016. The latest estimates, published Monday, call for a 1.18 percent contraction followed by 1 percent growth, respectively.

Interest Rates

Even as the economy stalls, analysts expect inflation will quicken to 8.26 percent in December, exceeding the 6.5 percent upper limit of the central bank’s target range.

While local investors and companies deal with the effects of the recession on a day-to-day basis, global money managers are looking at longer-term prospects for the economy as Finance Minister Joaquim Levy vows to shore up government accounts.

The real’s 12 percent plunge versus the dollar this year is making Brazilian stocks a better deal to investors, who are willing to sit out the slump and expect earnings to recover, according to Julian Mayo, the co-chief investment officer at Charlemagne Capital Ltd. in London.

“Brazil is beginning to look attractive,” Mayo, who helps manage $2.3 billion in developing-market assets, said in an interview. “There are some very good businesses, very good management and companies also that have done very well in difficult environments.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE