Interest rates, surprise with the US and interventions: what explains the outflow of foreign money from the Brazilian stock market

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International investors took more than R$20 billion from shares listed on B3, the Brazilian stock exchange. Stock market loses more than R$22 billion in capital in 2024 Foreign investors took more than R$20 billion from the Brazilian stock market in this first quarter, data from B3 shows. This is a change in foreigners’ mood towards the country, right after a series of record-breaking closures last year. Analysts interviewed by g1 attribute the situation mostly to external factors, but with a good “spice” of national problems. There are three main issues: Always after a bullish moment come periods of investor profit-taking and position adjustment; There was a reassessment of the economic situation and the level of interest rates in the United States, which shifted resources there; The Brazilian fiscal framework and the federal government’s interventions in important companies in the stock index brought extra losses to the country. To understand, you need to go back in time a little. At the end of the year, the global economy signaled a moment of cooling in inflation and the possibility of an earlier interest rate cut in developed economies. In the USA, there was an expectation that the Federal Reserve (Fed) would start reducing American interest rates in March. The message to investors was that American Treasuries, the safest fixed income securities in the world, would soon pay less. In Europe, inflation was showing signs of easing, and the European Central Bank (ECB) also began considering the start of interest cuts. In the financial market, everything is anticipated. And both facts benefit the stock exchanges because, with lower interest rates, it is necessary to take more risk so that investors can guarantee a good return. Thus, emerging countries are once again considered, as their most profitable companies can guarantee good money. And the relief in the external scenario added to good Brazilian indicators. The Brazilian Gross Domestic Product (GDP) came in above expectations, services inflation showed a slowdown and the country was already in the middle of a cycle of cutting the basic interest rate since August. Ibovespa, the main stock index on the Brazilian stock exchange, experienced a boom at the end of 2023. Back to the data on foreign investments, almost R$40 billion entered in the last two months of the year. In the month of December alone, Ibovespa accumulated gains of more than 5% and broke successive scoring records. It ended the year with a gain of more than 22%. At the turn of 2024, almost all of these factors have changed. SP stock exchange this Monday (2). BRUNO ESCOLASTICO/PHOTOPRESS/ESTADÃO CONTENT Time for a turning point The water began to spill due to the work of the Fed, the American central bank. When publishing the December decision, the Federal Open Market Committee (Fomc) reported that recent indicators suggested that the country’s economic activity “slowed down from the strong pace recorded in the third quarter”. Elsewhere, the panel reaffirmed that American inflation remained high, but recognized that prices had decreased in the last year, in addition to “moderate” gains in employment. The financial market understood that the time to lower interest rates was close. In January, the tone was much more cautious. The Fed said it did not consider it appropriate to reduce the interest rate interval until it had “greater confidence that inflation is moving sustainably towards 2%”, the country’s target. In addition to persistent inflation above 3% in the 12-month window, American GDP brought surprises in this first quarter. In data from this Thursday (28), the indicator registered an annualized increase of 3.4% in the fourth quarter of 2023, above what was expected at the beginning of last year. The US job market remains strong. Unemployment rose to 3.9% in February, but it is still very low and there is a sign of rising wages, which puts more pressure on inflation. According to Luís Stuhlberger, president of Verde Asset, part of the reason the United States economy is strong despite the high level of interest rates is the strong increase in spending seen during the pandemic. “The monetary and fiscal policy of the United States during Covid, the distribution of money, has no parallel in history,” said the executive during an event recently promoted by Hedge Investments. “It was known that there was already a good vaccine in October and [os EUA] continued distributing money and with an extremely aggressive policy for another year, only to later realize that they had gone too far”, he added. In other words: with strong economic activity and rising wages, there are doubts in the Fed’s mind as to whether it is possible to lower rates interest rates without putting inflation at risk. As a result, the financial market, which estimated a drop in interest rates in the country in March, started betting on May and, today, already has doubts about June. For Daniel Cunha, chief strategist at BGC Liquidity, the update of this set of information makes it natural for the USA to stand out. With high interest rates on safe investments at the same time that the economy shows strong signs, there is a preference for allocating resources there. “There were gains even in terms of investment flow on the stock exchange, as they host the main technology companies there, which benefit from Artificial Intelligence and which seem to be the major investment theme of the moment”, he states. The ‘spice’ of interference Given the context, it is necessary to return to the Brazil. With a competitor of this size, it makes sense that the Brazilian stock market would lose out. In addition to the flow of dollars being naturally directed outward, there was a relevant gain at the end of 2023, which would be pocketed at the beginning of 2024. Internal issues then come into play. Debates about the fiscal scenario, for example, continue to be in the focus of investors, who continue to pay attention to government signals to find out the possible results of the first year of the fiscal framework. According to Stuhlberger, there has been a worsening of the fiscal situation in recent years, with an increase in public spending and a loss of revenue on the part of the government — according to the executive, if the Spending Ceiling still existed, the country would be R$300 billion above of the limit. “But, having said that, revenue is better, last year’s GDP surprised upwards […] and this year’s GDP will also surprise upwards”, said Stuhlberger at an event. Furthermore, the Brazilian stock exchange is closely linked to companies that produce commodities, at a time when developed economies are calibrating interest rates to slow down activity with minimal damage and China is undergoing a complete reassessment of its economic matrix. These were already challenging times, until the federal government’s interventions in two companies that were crucial to the good performance of the Ibovespa came into play: Vale and Petrobras. The two companies have a large stake in the Ibovespa portfolio. Vale was already suffering from a drop in mineral prices on the international market, which would reduce its profitability. Until an attempt by President Luiz Inácio Lula da Silva (PT) to gain allies in the company’s succession made the situation worse According to Ana Flor’s blog, Lula had been moving to take former Finance Minister Guido Mantega to the helm of the company. The gesture was not well received by the market. The Minister of Mines and Energy, Alexandre Silveira, even said in an interview that Lula “would never be willing to make direct interference” in a publicly traded company. But a Vale board member, José Luciano Duarte Penido, resigned from his position in March precisely because he “disagreed” with the succession process of the company’s current president, Eduardo Bartolomeo. In a letter addressed to the president of the Board of Directors, Daniel Stieler, Penido says that the process has been manipulated and that it suffered “evident and harmful” political influence. Amid the confusion and speculation, Vale lost almost 18% of its market value in 2024. At Petrobras, the case was even more direct. The company recorded its second highest historical profit last year, of R$124.6 billion. When its balance sheet was released in March, the market learned that the oil company had decided to pay only the minimum dividends to shareholders, without the so-called “extraordinary dividends”. Instead of being distributed, the remaining profit for the year, which totaled R$43.4 billion, was entirely allocated to the capital remuneration reserve, which, according to the company, is intended to ensure resources for shareholder remuneration and share repurchases. actions. Holding the money in cash was a request from the government, which wants the company to accelerate investments instead of being a dividend payer. Those who hold the company’s papers, of course, didn’t like it. Petrobras: what was the market’s surprise for a 10% drop in shares in one day In one day, Petrobras had a 10% drop in the stock market, losing R$55 billion in market value. As the company had achieved significant appreciation in 2023 and at the beginning of 2024, the gain from preferred shares this year is practically zero. “They were vectors that accelerated, that reinforced this outflow of foreign flow. It was the sum of more general components, of capital reallocation with the change in expectations abroad, and a specific component here, with interference”, says Daniel Cunha, from BGC Liquidez. Cunha also says that it is too early to talk about a structural outflow of money from the country. After all, the tendency is that, at one time or another, the Fed will start cutting American interest rates, bringing investors’ attention back to emerging markets. And the assessment also involves the level of Brazilian interest rates. In the latest Copom Minutes, the BC reported this Tuesday (26) that given the “uncertainties of the scenario” regarding inflation in the coming months, it deemed it appropriate to have “greater flexibility” in interest policy and, therefore, avoided projecting a cut of the Selic rate in June this year. The March inflation preview, released this week by IBGE, shows that the Brazilian situation is not yet pacified. On the occasion, the economist for Brazil at BNP Paribas, Laiz Carvalho, commented that the underlying services — an indicator that the entire market is keeping an eye on due to its weight in the BC’s decision — came with a number slightly higher than expectations (from 0.36% to 0.40%), despite the slowdown in relation to previous months. “Slowly, but it’s slowing down. This corroborates our thesis that underlying services should return to seasonal behavior already in March’s closed IPCA and April’s IPCA-15,” she stated. Without falling interest rates, Ibovespa may still have more to lose. Only with more precision as to what the Selic rate will be at the end of the interest rate cut cycle can investor appetite be projected to return to the stock market in 2024. *Isabela Bolzani collaborated

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