Fiscal uncertainty banking crisis keeps foreigners away Stock Exchange – 03/29/2023 – Market

Uncertainties about the conduct of the Brazilian government’s economic policy, with the market anxious about the presentation of the new fiscal rule, added to the banking crisis in the United States and Europe, have been reflected in withdrawals by foreign investors from the Stock Exchange .

According to B3 data, in March, until the 27th, sales of Brazilian shares by foreigners exceeded purchases by around R$ 2.3 billion, continuing the trend already observed in February, when the net withdrawal by foreign investors amounted to R$ 1.68 billion.

The recent movement represents a reversal of the trajectory seen since the middle of last year — from June 2022 to January 2023, foreigners registered net contributions in Brazilian shares, having even been one of the main responsible for the 4.7% rise of the Ibovespa in the last year. In the accumulated of 2022, foreigners allocated approximately BRL 120 billion on the local exchange.

Without the international investor, the Ibovespa accumulates a drop of around 7.5% in 2023.

Co-CEO and director of investments at the manager Alphatree Capital, Rodrigo Jolig says that the political uncertainty and noise related to the new fiscal framework and the BC (Central Bank), with reiterated criticisms by President Luiz Inácio Lula da Silva (PT) of Roberto Campos Neto, affects the willingness, either locally or abroad, to seek risky assets such as equities in emerging markets such as Brazil.

“The political noise worsens the outlook for the Stock Exchange and the risk appetite of foreign investors”, says Jolig.

He adds that the case involving Americanas, and the doubts that still hover in the market regarding the financial health of other retail companies, is also a factor that may have contributed to foreign investors opting to reduce their allocation in the country.

Chief Economist at MUFG (Mitsubishi UFJ Financial Group) Brazil, Carlos Pedroso says that, like local investors, foreigners who remain in Brazil have probably preferred to bet on fixed income with the attractive return of 13.75% of the Selic than take a risk on the stock exchange.

Data from the external sector of the BC show that in March, until the 22nd, we had outflows of almost US$ 1.5 billion in foreign investments in shares, but with US$ 1.1 billion in inflows in public bonds, says Pedroso.

“This means that there has been a reallocation of the portfolio, that is, the foreigner is seeing the share price fall and prefers to withdraw funds from the Stock Exchange at this time so as not to have a greater loss and migrate to an asset such as government bonds that are yielding interest very good”, says the economist.

Jolig, from Alphatree, also states that, given the current level of interest rates and the signals from the Central Bank that they will not fall anytime soon, the shares will hardly be able to engage in a more consistent rise in the short term, which leads him to maintain the funds portfolio a “short” position on the Ibovespa, which gains with the fall in the stock index.

“We have an even more cautious mind. When it becomes clearer that the monetary policy cycle will start to ease interest rates, I think it will be possible to have more clarity to take more risk on the Stock Exchange”, says Jolig.

“While the government does not show clear signs of really wanting to advance the fiscal agenda, it will be difficult for gringos to enter our market with force”, endorses Julio Hegedus Netto, chief economist at Mirae Asset Wealth Management.

Research head at Guide Investimentos, Fernando Siqueira says that, historically, the flow was greater in moments of more liquidity in the international market, more consistent growth of the Brazilian economy and when commodities were on the rise. “This is not currently the case,” says Siqueira.

He also says that, in the external scenario, the banking crisis in the US and Europe, in the wake of the process of monetary tightening in developed economies, also affected global investor demand for opportunities in riskier markets such as emerging ones.

Pedroso, from MUFG, adds that, in a scenario of increased interest rates by the Fed (Federal Reserve, US central bank), investment in fixed income in the American market becomes more attractive to foreigners, at the same time that the Monetary tightening tends to slow down the economy, with a potential negative impact on companies and stocks on the stock exchange.

“The locals have already left the Stock Exchange to take advantage of interest on fixed income. Now, with foreigners leaving as well, interest in the shares has diminished a lot”, says George Wachsman, director of Empiricus Investimentos.

Wachsmann also states that, after the massive inflow of resources in 2022, with Brazil benefiting on investors’ radar with the “lockdown” in China and the war in Ukraine, and that after the already significant contribution of around BRL 40 billion in previous year, it is natural that, at a time of greater risk aversion on a global scale, foreigners make some adjustments in the allocation they maintain in the Brazilian market.

The director of investments at Empiricus also says that, since the election race in the middle of last year, international investors have shown a preference for President Lula’s victory compared to former President Jair Bolsonaro (PL).

With the lack of concrete advances in the economic field in the first months of the government, a feeling of frustration may have weighed on the reduction of allocation in the country, he says.

“I see a combination of a bad mood globally and a bad mood with Brazil,” says Wachsmann. “It is not for any other reason that the Exchange flirted with 97,000 points”, he adds.