RIO DE JANEIRO, BRAZIL – From January through September, Ibovespa, the benchmark index for the Brazilian stock market dropped 6.75%. Considering the dollar variation in the period, the plunge is 11.67%. In the United States, during the same period, the three main indicators accumulate gains. Dow Jones, S&P 500 and Nasdaq increased by 10.58%, 14.68% and 12.11%, respectively.
The Brazilian performance also diverges from the growth of other relevant Stock Exchanges in the American continent. In the north, Canada’s S&P/TSX and Mexico’s S&P BMV IPC indexes increased 15.86% and 12.93%, respectively, while in the south, Argentina’s Merval index delivered increases of 28.70%.
In the same period, the Euro Stoxx 50 index, which comprises 50 stocks of companies with the highest trading volume in Europe, rose 7.85%. The benchmark indexes of the London (8.16%), Paris (11.16%), and Frankfurt (4.74%) stock exchanges also rose.
Among the stock markets of developed economies outside North America and Europe, Australia’s S&P/ASX 200 index rose 4.35%, while Japan’s Nikkei retreated 0.57%. All comparisons consider quotations in U.S. dollars, based on Bloomberg data.
An important part of these gains may be attributed to the expansionist monetary policies of developed countries, which pledged capital in the markets by buying assets and reducing interest rates, measures taken to mitigate the damage caused by restrictions imposed fight the pandemic.
The most significant stimulus package is adopted by the Fed (Federal Reserve, the U.S. central bank), which still maintains monthly purchases of assets worth US$120 billion while keeping the basic interest rate close to zero. With money flowing into the stock markets and fixed income paying little, investors have been taken by a positive sentiment toward risk markets, albeit in a world still in crisis.
The impact of these expansionary policies on developing economies, however, has not been uniform. Among the 5 large emerging markets that make up the BRICS bloc, of which Brazil is part, the Indian and Russian stock markets rose 23.98% and 11.68%, respectively, while South Africa’s fell 9.82%. The Shanghai Stock Exchange, the main one in China, retreated 5.42%, as did the Hang Seng index by 10.12%, a reference for the Hong Kong market, also in China.
The slowdown in China is part of the reason why Brazil has not been able to benefit from the global growth window. The destination of most commodities produced by some of the main companies that make up the Ibovespa, China found in the pandemic obstacles to continue its planned shift to wind and solar energy matrices, thus reducing its dependence on coal in an attempt to reduce its emissions of approximately 10 gigatonnes of CO2 (carbon dioxide) per year.
Among the consequences of the restrictions imposed by Covid, however, the disorganization of supply chains has disrupted the production of components for equipment needed to expand wind turbines and photovoltaic cells at a time when China has closed some of its coal mines.
Without sufficient resources to meet its energy demand, the country is rationing, affecting its industrial production and further exacerbating the shortage of manufactured goods in the world, while also pressuring the prices of inputs for energy production, such as oil.
“China is the biggest manufacturing player on the planet, the factory of the world, and these issues are creating a supply shock: the planet needs to produce but has no capacity because there is a shortage of inputs,” says Roberto Dumas, professor of Chinese economics at INSPER.
As a result, Brazil is not only harmed by the reduction in Chinese demand for commodities, such as iron ore produced by Vale, but also becomes less attractive given the expectation of an increase in basic interest rates in the United States and Europe, an expected scenario due to the escalation of global inflation.
The detachment of the Brazilian Stock Exchange from the others in a period of expansion, however, cannot be entirely attributed to the shift in the international context, according to Dumas. “Global economies are growing less, but they are not stationary. China and the United States will ultimately grow, unlike what is occurring in Brazil, which cannot advance due to its peculiarities and structural characteristics,” he says.
“We primarily have domestic factors affecting the stock market here, such as the PEC [Proposed Amendment to the Constitution] postponing payment of court-ordered federal debt, the emergency aid benefit package, and the water crisis, all in a scenario in which the 2022 elections are drawing nearer,” says XP stock strategist Jennie Li.
The court-ordered debt PEC and the emergency aid summarize the country’s fiscal threats scenario for next year: while the government’s economic team is unable to make progress in its attempts to reach an agreement in Congress and the Judiciary to defer part of the payment of R$89 (US$16.2) billion of recognized judicial debts scheduled for 2022, President Jair Bolsonaro is pushing for resources to expand income distribution in an election year.
The risk is driving more investors to seek protection in the dollar and increasing pressure on the exchange rate, while the shortage of rainfall increases the cost of power generation, a combination that further accelerates already high inflation in a context of global scarcity.
The Central Bank’s reaction is to raise basic interest rates in order to curb the rise in prices by contracting credit. The side effect is an economic slowdown and an even less attractive market for investors. However, this solution may not be enough while there is the threat of unbalancing public accounts, according to Integral Group chief economist Daniel Miraglia.
Miraglia also points out that, despite the effect of China on Brazil, there are few common reasons between the downturns in the two countries’ stock markets.
In China, even the crisis in the real estate sector caused by the collapse of Evergrande is related to decisions planned by the Communist Party of China, which seeks to balance its economy, mostly focused on the production of goods, to provide more space for domestic consumption, the analyst said.
“They are very different situations, since China plans for the next 100 years, while Brazil’s electoral dispute influences decisions every four years,” he says.
INVESTORS SHOULD AVOID SPREADING STOCKS
Despite the blurred outlook ahead, investors should avoid spreading stocks in this bearish moment, and should they stomach the market’s swing, they may even increase their exposure to solid assets that may be cheap.
In this case, the goal is to strengthen a long-term investment portfolio unrelated to specific goals, such as the purchase of a property in a certain period or retirement, says Suno’s head of consulting Ivens Gasparotto.
“You should invest in the stock market because you want to take part in the companies’ profits, in the economy, to collect dividends, but you shouldn’t do this if you expect to make enough profit to buy a house in 5 years,” he says.
“The investment should be planned for 10 or 20 years, at least, because it is unlikely that in this period the investment will result in a loss,” Gasparoto says.
For anyone who invested while the Ibovespa was climbing to 130,000 points at the turn of the first to the second half of this year and only now has found themselves averse to risk, Paloma Brum, investment analyst at Toro, recommends maintaining at least part of the assets.
“Over the years, the stock market converges to profit,” she says. “If we take Vale stock as an example, the company is in a better position than its peers on the international market, which is a good measure to know that the stock is cheap.”
Source: Folha