Foreign investors stay away from the Brazilian stock market – 03/27/2024 – Market

With uncertainty about American interest rates and local political noise, the Brazilian Stock Exchange has been losing resources from abroad. Since the beginning of the year, foreign investors have already withdrawn R$21.8 billion from B3, dragging with them the performance of Ibovespa.

The exit comes after a strong movement of optimism. In the last quarter of last year, the balance of foreign investment in B3 was R$45 billion, which led Ibovespa to break its historic nominal record. Now, the index is expected to fall by 4.84% in 2024.

The main reason for the reversal in foreign flow was changes in interest rates in the United States.

At the end of 2023, weaker inflation and employment data strengthened projections that US rates would start to fall as early as March this year, which boosted riskier markets.

In recent months, however, new numbers have shown the resilience of the American economy, which has cooled the most optimistic projections about interest rate easing.

“Throughout the year, expectations were being adjusted and interest rate cuts were being pushed further and further forward, which hindered the flow to emerging countries like Brazil. The interest rate curve in the US shifted upwards, and the flow of foreign investors was negative for much of the quarter”, says Fernando Siqueira, head of research at Guide Investimentos.

At its last meeting, the Fed (Federal Reserve, the American central bank) decided to keep American interest rates in the range between 5.25% and 5.50% and projected three rate cuts this year.

The expectation, however, is that the first reduction will only occur in the second half of the year.

The local market, however, was also affected by political noise involving the most important companies on the Ibovespa: Petrobras and Vale.

In the case of the oil company, the board of directors’ decision to withhold the distribution of extraordinary dividends, under pressure from the government, collapsed its assets.

Several banks downgraded their purchase recommendations for the shares. The company lost more than R$55 billion in market value in one day.

The mining company suffered from attempts by the Lula government to place a name it trusts as head of the company.

“The attempts at intervention in Petrobras and Vale increased the perception of risk among investors and increased doubts about a possible more interventionist government. The political and economic situation in Brazil, compared to the more stable and attractive environment in the USA, explains, to a large extent part, the exit of foreign capital from the Brazilian Stock Exchange in 2024”, says economist Bruna Alleman, head of international investments at Nomos.

Capital market specialist Ricardo Jorge, partner at Quantzed, makes the same assessment. For him, political noise brings volatility and drives away investors, especially those with a more conservative profile, who are less willing to take risks.

“Any sign of interference in a public company by the government is something that generates unnecessary noise. Companies should be as autonomous as possible, and the market will fluctuate depending on the possibility and chance that the government has of being able to succeed in these interventions “, says Jorge.

Last week, investment bank Goldman Sachs recommended, in a report, that investors bet against Brazilian state-owned companies and prioritize the allocation of resources in private companies, which can benefit from the current cycle of falling interest rates.

According to Goldman analysts, recent developments surrounding Petrobras’ dividend policy reminded investors of cases of greater government involvement in state-owned companies.

“Such events typically led to a higher risk premium for Brazilian assets,” says the report.

Despite this, uncertainties about abroad continue to be the main catalyst for the timid performance of Brazilian assets. In addition to American interest rates, the slowdown in the Chinese economy continues to worry and increase investor caution.

The weaker performance of China’s economy, in fact, directly affects Vale’s shares, as the country is a large buyer of iron ore, and projections of lower demand have been bringing down the prices of the commodity — and, consequently, shares. of the mining company.

In this sense, asset strategist Bruno Madruga, from Monte Bravo, states that the recent political noises are occasional, and the Brazilian market remains linked to movements in American interest rates.

“The movement of the market is much more linked to the United States than to Petrobras or Vale during this period. In the case of Vale, there was a drop in iron ore and naturally there was an outflow of foreign capital in this asset. At Petrobras, there was a fluctuation in oil These interferences are short-term noise”, says Madruga.