Capital market expects recovery after the fall of 2022

Signs of concern from the government’s economic team with the fiscal adjustment – ​​despite uncertainty about the results – and greater interest from foreign investors may help the Brazilian capital market to perform better in 2023. On the other hand, statements by President Luiz Inácio Lula da Silva (PT) against the balance of public accounts and the growth of bets that the basic interest rate (Selic) will remain high until the end of the year cast some clouds on that horizon.

The number of mergers, acquisitions and trading on the stock exchange throughout 2022 plummeted compared to the previous year. Not only because of investor concerns about the election, but also because of the effects of the anti-Covid lockdowns in China and the invasion of Ukraine by Russia – which caused inflation to skyrocket around the world, contributing to an increase in interest rates in several countries. .

To reduce exposure to risk, investors began to avoid variable income and bet on fixed income, as shown by the most recent reports from consultants such as KPMG and Kroll and the Brazilian Association of Financial and Capital Market Entities (Anbima).

Despite some difference between the numbers calculated, reports indicate that capital market activities decreased drastically in 2022. There was no IPO and there were 18 additional issues of securities (follow-ons) at B3, which allowed companies to raise BRL 55 billion. The value was 57% lower than that of 2021, when R$ 128 billion were transacted in 50 IPOs and 26 follow-ons.

On the other hand, the number of companies merging with others or even acquiring new operations to expand the market and remain relevant had the second best year in the historical series, totaling 1,728 transactions. It was a number just 12% lower than that of 2021, when a record of 1,963 operations was reached according to KPMG.

In both segments of the capital market (shares on the stock exchange and mergers and acquisitions), operations began 2022 with good prospects, but which ended up fading with the worsening of the international economic scenario and the increase in medium and long-term uncertainties in the scenario local economy, especially in the second half, explains Luis Motta, partner-leader of mergers and acquisitions at KPMG.

Alexandre Pierantoni, head of corporate finance at Kroll in Brazil, explains that this uncertain scenario – here and in the rest of the world – has made investors more selective and the market more restrictive to new operations.

“The market itself only accepted those more resilient companies that were already in operation, mainly in the infrastructure sector. And, between mergers and acquisitions, negotiations grew for businesses to capitalize, expand the number of services offered and be present throughout the consumption chain”, says Pierantoni.

See the total performance of the capital market in 2022:

José Eduardo Laloni, vice-president of Anbima and president of the Capital Market Structuring Forum, says that there was a “synchronized movement of difficulty in issuing variable income, with inflation resisting even with the monetary tightening made by the countries”.

Around here, secondary share issues accounted for almost all of the exchange’s activities, totaling R$54.6 billion throughout 2022. And most of that amount came from Eletrobras, which was privatized for R$33.6 billion .

“From a market point of view, [a Eletrobras] created a different player with the possibility of growth for a company that was public and now has a different configuration of management and governance”, says Laloni.

Anbima says that the variable income market as a whole plummeted throughout 2021, with a 40.4% drop in hybrid securities, such as promissory notes and real estate investment funds, with R$87 billion issued.

On the other hand, fixed income securities such as CRIs and CRAs (Certificates of Real Estate and Agribusiness Receivables) and debentures grew 6.6%, totaling R$ 457 billion in the year.

Analysts see more optimism in 2023. But there are caveats

For Pierantoni, from Kroll, the scenario in general is more optimistic than seen previously, with Brazil signaling a better economy for the world based on a more stable performance of the stock exchange and the exchange rate.

Another positive indicator for the market, he assesses, is the stability in the relationship between the three Powers of the Republic, mainly after the January 8 attacks on the headquarters of the Executive, Legislative and Judiciary in Brasília.

“The expectation is that with some clouds clearing on the horizon, we should have a slightly better 2023”, adds Guilherme Maranhão, vice president of the Capital Market Structuring Forum.

On the other hand, William May, one of the partners at L6 Capital Partners, points out that there are corrections to be made by the new government’s economic team, as an indication of greater control over public accounts and a more uniform discourse.

In recent weeks, statements of concern about the public deficit coming from the Minister of Finance, Fernando Haddad, were counterbalanced by statements to the contrary by President Lula. The President of the Executive has also been attacking inflation targets and the independence of the Central Bank, which is not usually well received by investors.

Another factor that may inspire caution in the capital market is the direction of interest rates. After the first meeting of 2023, the Central Bank’s Monetary Policy Committee (Copom) indicated that the basic rate (Selic) may remain high until the end of the year – which tends to maintain interest in fixed income securities, in addition to worsen the prospects for consumption and the Gross Domestic Product (GDP).

Brazil as an investment alternative

Although President Lula has already hammered out that there will be no more privatizations, investors are eyeing concessions in the states, such as highways, railways and airports, as well as energy and sanitation infrastructure and environmentally sustainable policies.

The participation of ministers Fernando Haddad, of Finance, and Marina Silva, of the Environment, in the World Economic Forum in Davos also indicated a commitment to investments aimed at the green economy, which is well seen abroad.

“We have to take advantage of this growth in themes like ESG, which we have to lead. And this is going to be a key turning point, where we are going to bring credibility and resources to the country, to all sectors”, says Pierantoni, from Kroll.

José Eduardo Laloni, from Anbima, points out that investors’ concern with ESG policies in business will be the main focus of the market this year, in a movement that started in 2022 and tends to grow.

For him, there is important work to be done so that “the capital market makes issues that are more in line with what the investor is asking for, and not only him, but us as a society”.

Another factor that can make the country more attractive to the international market is the adoption of measures to improve the business environment that are more in line with the principles of the Organization for Economic Cooperation and Development (OECD).

The entry into force of the New Legal Framework for the Foreign Exchange Market, in the last days of 2022, reinforces the Brazilian intention to reposition itself as an important global player that goes beyond the green economy, simplifying and reducing costs for operations with foreign currency.

Furthermore, the scenario of recession that has already been taking shape in the United States and in European countries may be advantageous for Brazil, according to William May, from L6 Capital Partners. “We are seeing bad results in the United States and Europe, inflation, high debt, all of this also influences here. We are seeing more confident investors [em investir] here,” he says.

In the analysts’ projection, this combination suggests better business this year, with the continuity of the volume of mergers and acquisitions seen last year – possibly breaking yet another record – and the resumption of the IPO on the stock exchange. Kroll projects between 20 and 30 IPOs and follow-ons, generating from BRL 70 billion to BRL 80 billion in revenues “which will also be used for new mergers and acquisitions”, says Pierantoni.

The consultancy and L6 Capital Partners project that the largest fundraising movements will be aimed mainly at the most mature and well-structured companies that operate in the market, with emphasis on the entire agribusiness chain, logistics infrastructure, renewable energy, finance, education and health.

“On the curve for the year, towards the third and fourth quarters, with everything performing as we are projecting, we will also have sectors associated with consumption, with the recovery of the economy as a whole. Durable and non-durable consumer products, packaging, return between the second half and the beginning of 2024 to enter this positive curve”, concludes the Kroll Brasil executive.