Dollar engages in a sequence of falls and the stock market rises with the return of local investors; understand the scenario

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Ibovespa, the main stock index in the country, rose almost 10% in the last two weeks, while the dollar fell more than 5% and is quoted at the lowest level in a year. Analysts, however, are still cautious to say that Brazil is ‘the ball of the hour’ in the markets. B3 headquarters in São Paulo B3/Reproduction The news that the risk rating agency S&P Global Ratings raised Brazil’s credit rating from stable to positive gave even more impetus to a market that had already been buoyant. This month, based on the close of the 19th, the Ibovespa, the main stock index of the Brazilian stock exchange (B3), has already risen by almost 10%, and is very close to 120,000 points. The dollar, in turn, accumulates a fall of more than 5%, the lowest level in a year and below R$ 4.80. Last Friday (16), Goldman Sachs bank reduced its projections for the American currency in 2023, considering that it should close the year at R$ 4.40. According to experts heard by g1, the positive feeling with the Brazilian market in recent weeks can be explained, above all, for the following reasons: 🏦 the return of local investors to risk assets, especially institutional ones; 🌎 the permanence of foreign investors in the domestic market; 📉 the higher-than-expected deceleration of inflation; 📝 greater clarity on the direction of tax policy in the country; 💰 the perspective that Selic, basic interest rate, should start to fall soon; 🗽 the perspective that the trajectory of interest rates in the United States should also slow down. The return of local investors combined with the permanence of foreign investors in the domestic market has been the main driver behind the good performance seen in recent days. And the renewal of this interest, in turn, is due to the prospects involving inflation, interest rates and fiscal policy in Brazil, in addition to the direction of monetary policy in the United States. With inflation more under control, the expectation is that the Central Bank of Brazil (BC) will begin to reduce the Selic rate. If interest rates are lower, fixed income will also deliver lower profitability and this favors the migration of resources to assets that can offset this reduction. Among them, the stock market. The definition of a new fiscal framework also contributes to these projections, as it brings the prospect that government spending will be more controlled — a positive point for inflation expectations and, consequently, for interest rates. Finally, the Federal Reserve (Fed, the US central bank) interrupted its cycle of hikes in interest rates in its last meeting and, despite warning that it may raise them again if inflation proves to be more persistent, it increased investor appetite for risky assets. That’s because, if interest rates go up there, fixed income in the country also becomes more attractive. However, as US government bonds are considered the safest in the world, a rise in US rates leads to investors fleeing emerging markets such as Brazil. In this sense, the optimism with the stock exchange and the Brazilian currency raised a question among investors again: is the national market the best option, when compared to the foreign market? See more details below. Rapporteur of the fiscal framework in the Senate says that the Constitutional Fund of the DF is maintained Who is investing in Brazil today? Carla Argenta, chief economist at CM Capital, points out that, at the beginning of the year, foreigners supported the national market, with the expectations they had regarding the new government of Luiz Inácio Lula da Silva (PT). On the other hand, what we see now is a return of local investors, who have returned to invest in the country with the perception that the direction of the economy may be more positive than expected. The main investors in Brazil are currently foreigners, with around 53.9% of the market. Local institutional investors (which are banks, companies or people with large fortunes) have a 27.7% share, and individual investors, 13.9%. The data are from an XP survey. This shows that foreigners are the main “owners” of the Ibovespa, but it does not mean that international investors invest a lot in Brazil, explains CNPI analyst Vitor Miziara. In fact, the amount allocated to the country still represents a small fraction of global investments and this value can fluctuate a lot based on a series of factors, including external ones. This happened in May, for example: despite the good performance of the Ibovespa, the flow of foreign capital was negative, with an outflow of approximately R$ 4.2 billion from domestic assets. According to Lucas Serra, an analyst at Toro, this movement was driven, above all, by the risks involving the renegotiation of the US debt ceiling, which left investors apprehensive. Wars, political crises, pandemics and the movement of interest rates in developed countries, mainly the United States, are external reasons that can impact the entry of foreign money into Brazil. Moments of instability make the market prefer safe assets, minimizing losses. On the other hand, in the accumulated from 2023 until last month, the international flow remains positive at BRL 9.5 billion, while projections for June already indicate a return from abroad. Institutional investors, on the other hand, returned to allocating their resources in Brazil and the country registered an inflow of BRL 2 billion, with the improvement in the outlook for fiscal policy and projections of decreases in interest rates (read more below). As Jennie Li, stock strategist at XP explains, what this shows in practice is that the good performance of the Ibovespa in recent weeks can be explained as a combination of everything that foreign investors have already invested this year, despite the fall in May , and the return of national investors to the stock exchange. Inflation, interest and fiscal framework Inflation is already starting to show better signs for the country. In the latest release by the Brazilian Institute of Geography and Statistics (IBGE), the Extended Consumer Price Index (IPCA) increased by 0.23% in May, well below market expectations and with a sharp deceleration compared to previous months. The main consequence of this is the increase in expectations that the BC’s Monetary Policy Committee (Copom) will start a cycle of interest rate cuts in the coming months. Today, the Selic rate is at 13.75% per annum. Miziara comments that the projections for the interest rate already in 2024 point to 11% per year and this drop perspective was one of the main reasons for bringing back institutional investors to the Brazilian stock exchange. “With the drop in interest rates, Brazilian investors will look for ways to bring more profitability to their portfolio. The stock exchange is a way to take advantage of the drop in interest rates, and also due to the performance of stocks. With lower interest rates, there is a lower financial cost in debt , which can generate more profits for companies”, explains the analyst. The other important point for both the return of domestic investors and the greater attraction of foreigners is the fiscal framework. Jennie Li, from XP, points out that the proposal presented by the government is not ideal from the point of view of economists and other market specialists, but that it already brings greater visibility to the issue of the importance of controlling public spending. This already encourages investors, who understand that spending control brings a trend of inflation that is also controlled. Daniel Moura, specialist in capital markets, shares the same view and adds: “As everything indicates, the new rule is more permissive, but allows for continuity of the fiscal improvement that we have had in recent years. In summary, if Brazil continues with good reforms, especially where the tax is concerned, has everything to become the ball of the hour”. Service sector will be able to discuss different rates during the course of the tax reform, says Tebet Is Brazil the ‘ball of the hour’? According to Moura, “of the emerging countries, without a doubt, Brazil continues to be a good investment for both domestic and foreign market investors”. This happens because most of the countries similar to Brazil are experiencing some kind of instability. Russia and Ukraine, for example, are still at war. Argentina and Turkey are experiencing strong inflation and other serious economic problems. However, economist Carla Argenta, from CM, points out that, in relation to other emerging countries that are experiencing a better situation, the Brazilian market has not yet emerged as a protagonist. The biggest competition currently comes from Mexico. With regard to currencies, for example, the real is the fifth with the highest appreciation against the dollar in a year, according to a survey carried out by Henrique Castro, professor of finance at FGV. Already in the accumulated from 2023 until now, the Brazilian currency is only behind the Mexican peso. Check, in the table below, the variations of the main currencies against the dollar. With regard to the stock market, Mexico’s main stock index, the Mexbol, also gains an advantage over the Ibovespa. In 2023, until the last day 15, the Mexican index rose by around 12.15%, while the Brazilian one had a slightly less expressive increase, of 8.51%. Carla Argenta explains that these numbers reflect that foreign investors have an appetite for risk assets in emerging countries, but those that stand out are those that offer more security. In this sense, a consensus among the experts heard by the report is that, for Brazil to continue receiving investments and consolidate itself as the preferred choice, it is necessary to set the course of fiscal policy, inflation and interest rates. “The market’s view is more optimistic with Brazil. We already have a fiscal framework that will not allow uncontrolled spending, inflation is cooling down, making risky assets more attractive and with an imminent start of interest rate cuts in the Selic”, he points out. André Fernandes, variable income leader at A7 Capital. “In addition, the GDP is surprising, companies are still delivering good results and many of them are still negotiating at multiple attractive rates.” What to expect ahead? According to experts, despite the more positive momentum and good prospects for the coming months, there are still a number of uncertainties on the radar. The main one concerns the progress of the economic reforms intended by the government, the highlight being the new fiscal framework, which should be voted on this week by the Senate. For now, there are no expectations that there will be any major changes to the text. But any surprise that could reduce the potential for controlling public accounts tends to have a negative impact on the market. Frederico Nobre, leader of Warren’s analysis area, comments that another point of attention is the tax reform, “which, if not well orchestrated, can reduce the profit expectations of companies (on the Brazilian stock exchange)”, making them less attractive . The last issue that can help or hinder the appreciation of the Ibovespa and the real is the monetary policy of the United States. Lucas Serra, from Toro, points out that in its last meeting, the Fed kept its interest rates unchanged – at a level between 5% and 5.25% a year – and had a speech in line with what was expected, stating that new highs can happen in case inflation rises again with great force in the country. “With this, the market may have a greater perception that the United States has reached or is very close to its terminal interest rate. This, in turn, tends to unlock value for variable income investments in general, including for the Brazilian stock exchange”, he explains. The other experts agree and there is a unanimous view that, with greater control over interest rate hikes in the world’s largest economy, the Brazilian market tends to benefit — and vice versa. Thus, another consensus is that the Brazilian stock market remains cheap — that is, that by analyzing its relationship between risk and return, shares have a good potential to be worth more — and that the chances of Brazil continuing to receive investments, local or foreign , is large, depending on the progress of the issues presented so far.

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