Brazil gains ground in emerging markets funds
Global scenario makes investors look at Brazil; outflows from stock market raise questions about the movement
Por Fernanda Guimarães — São Paulo
02/04/2024 09h45 Atualizado há 2 horas
Brazilian assets are gaining ground again in the portfolios of funds dedicated to emerging markets, despite the outflows seen at the beginning of the year amid a war in Eastern Europe, weak growth in China, and high interest rates causing a wave of reallocation. However, the permanence of this movement will be questioned if foreign investors continue to withdraw funds from the stock exchange in the coming months, which could occur if the horizon of monetary easing in the United States remains unclear.
Data from EPFR, a consulting firm monitoring the flow of global funds, shows Brazil increasing its share from around 6.32% to 7.5% in one year, according to the latest numbers released, from January. The data considers not only assets purchased directly on the Brazilian stock exchange but also shares listed on the U.S. market.
The Brazilian stock market saw a strong inflow in 2023, which helped the country increase its share in the global funds scenario. The foreign capital inflow last year reached R$45 billion. However, the situation changed amid uncertainties around interest rate cuts in the U.S. As a result, at the beginning of the year, the Brazilian stock market lost some R$22 billion in foreign funds. According to insiders, the outflow was likely caused by quantitative investors, who are more volatile and don’t normally follow investment theses.
Mariana Cahen Margulies, the head of equity at Santander’s brokerage firm in Brazil, says investors have maintained a favorable discourse about Latin America “as it has not been seen for a long time.” “Latin America stays away from the geopolitical noise. And there is a structural investment in energy and infrastructure,” she said.
Ms. Margulies said foreign investors’ positive view was evident at an event dedicated to Latin America held by Santander in New York in February, attended by important global market players. According to her, investors showed an optimistic view of the region at the event, with questions on specific investment theses. “Investors are preparing to increase their positions,” she said.
A survey carried out during the event confirmed her reading. Of investors attending the meeting, 57% said they expect to increase, in a moderate or significant way, their fund allocation in the region over the next six months.
Foreign investors’ optimism can be explained by some differences with local investors. Aline Cardoso, head of equity research and strategy for Brazil at Santander, said foreign investors have a longer-term vision, looking at two to three years. She points out that, in the process of asset reallocation, India has benefited, but Brazil may attract capital—also because of prices. In Brazil, the multiples reflected by the price-to-earnings ratio are low when compared to historical records. The P/E ratio is now 8 times, compared to 11.5 times in the past. Santander has an optimistic view of Ibovespa, Brazil’s benchmark stock index, projecting a 13% increase in 2024.
Fernando Ferreira, XP’s chief strategist, confirms the foreign investors’ interest in Brazilian assets, which can be seen in conversations with emerging markets’ fund managers. According to him, the low geopolitical risk, the lower price of assets in comparison to emerging markets such as India and Mexico, the local market’s liquidity, and the cycle of falling interest rates in Brazil have favored investors’ interest. He points out that the fact that these funds currently have an exposure of 7.5% in Brazil—compared to Brazil’s 5.5% share in the MSCI index—shows investors are “overweight” on the country.
However, according to Mr. Ferreira, there is an obstacle to increasing such participation as emerging markets funds have been struggling to raise capital. That is because competition with Nasdaq—and substantial gains in technology and artificial intelligence companies—in addition to China’s lackluster growth, while it remains the most important component of these funds, have kept new money away. He says the most important trigger will come when the U.S. begins to cut interest rates, together with an improvement in Brazilian companies’ results.
In the short term, however, the next picture of emerging funds is likely to change. Carlos Sequeira, head of research at BTG Pactual, points out that, given the outflow of foreign capital in the first quarter, Brazil’s share in these funds’ portfolios could decline.
However, he says the country has the potential to attract more funds. “Once interest rates fall, these investors will look for riskier assets and emerging markets have a risk profile that suits this type of investor.”
The BTG executive adds that the postponement of interest rate cuts in the United States is one reason behind the outflow of foreign capital from Brazil in the first months of 2024. However, according to Mr. Sequeira, two marginal issues affect investor’s interest in Brazil: resilient inflation, which could indicate a slower pace for interest rate cuts locally, and government interference in companies such as Vale and Petrobras.
On the other end, there is news that could help. Mr. Sequeira notes that, from August onwards, the entry of Brazilian companies listed abroad into the MSCI Brazil index, with the rebalancing of the index, should guarantee a capital influx, given the funds' adjustment. Brazil’s share in the index, which is currently 5.5%, is expected to increase with the entry of companies such as Nubank, Stone, and PagBank.
Daniel Bassan, the head of UBS BB’s investment bank, notes that the continued postponement of interest rate cuts in the United States has pushed forward the expected capital flows to emerging markets. “In 2023, Brazil was among the largest recipients of foreign capital, second only to India,” he said.
Claudia Mesquita, head of equity at Bradesco BBI, notes that this year capital has also been reallocated among emerging markets, with Mexico gaining ground based on the nearshoring concept of bringing production closer to the consumer market. However, she points out, that as Mexico and India assets are priced higher, Brazil tends to appear as the next target to foreign investments, depending on the U.S. monetary policy. This flow is expected to occur near the second half of the year. “Brazil has the reasons to benefit from this global repositioning,” she said. |
