RIO DE JANEIRO, BRAZIL – The growing wave of Brazilian investments abroad – in assets such as stocks, fund shares, and fixed income securities – experienced a slowdown at the end of last year.
After expressive results, especially in the second quarter, the movement has slowed down, and even the balance of the so-called portfolio investments was negative in the last three months of 2021.
Analysts attribute the reversal mainly to rising interest rates in Brazil and issues such as the more adverse external scenario and more attractive prices of some domestic assets.
The 12-month stock of Brazilian portfolio investments abroad was US$12 billion at the end of 2020 and reached US$18.4 billion in August last year.
Since then, there has been a slowdown, culminating with negative results – repatriation of funds by residents in the country – between October and December. With this, the balance in 12 months at the end of last year had decelerated to US$13.6 billion.
The story about how Brazilians started to look more for opportunities abroad is well known. On the one hand, institutional changes have allowed products such as BDRs, ETFs (index funds) abroad, and dollarized funds from renowned managers in the international market to be offered to a broader range of investors, not just the “private” clients of large banks. On the other hand, the reduction of interest rates in Brazil to the lowest levels in history has pushed investors to leave fixed-income products toward riskier assets.
“With the opening of investment platforms, access to these products has been democratized. If we look at the average from 2018 to 2020, we were seeing an average outflow of about US$300 million per month; this has hit US$1.5 billion per month recently,” says Alfredo Menezes, partner and CEO of Armor Capital.
The Selic hike seems to have put the brakes on this process, a movement that may have intensified earlier this year, says Menezes. “With the interest rate hike here, the stock markets out there realizing and the real strengthening, people are starting to see that that huge profit they were having [invested abroad] started to diminish,” he says.
“My opinion is that the re-entry movement should continue for a while. People here invested abroad with an average exchange rate of R$5.40 to R$5.50 are going to feel what the appreciation of the real turns into a loss for them.”
“The Selic is still much higher even though the central banks have already announced interest rate increases,” points out Sandra Blanco, chief strategist at Órama Investimentos. “Inflation abroad is also high and means that, even with interest rates going up, the investments there still have a negative real return for us.
Besides access to more products, two other factors contributed to Brazilians’ looking abroad, notes Marcello Curvello, currency manager at ASA Hedge. The first was the Brazilian real depreciation in 2021, which caused local investors to start paying more attention to the effect of the exchange rate on their assets.
“With that continuous depreciation, people realized that they were getting poorer in hard currency,” he says. In addition, some exits may have occurred in anticipation of the electoral cycle. “At that time, there was a greater fear of a very polarized dispute that could further hurt the performance of assets here.”
It is worth noting that Brazil historically has a much higher “domestic bias” towards assets than the average of comparable emerging economies. International Monetary Fund (IMF) data from the third quarter of last year show that the proportion of portfolio investments abroad to the GDP in Brazil was 3.7%.
In Mexico, it was 6.6%. In Colombia and South Africa, this proportion was 23.8% and 50.4%, respectively.
Tomás Awad, a founding partner of 3R Investimentos, points to the weaker performance of international assets recently as another factor that may slow the diversification movement.
“The feeling we have is that those who have been allocating more outside or increased their exposure to foreign assets are less sophisticated investors, who often move only with an eye on the latest performance. The larger investors are already more structured”.
According to Awad, the downturn now may be concentrated in some strata. “It’s something very individual, but for an investor who already had assets outside, probably his advisor already had a bias to diversify, no matter the exchange rate level, what the moment is.
On the other hand, the investor closer to the retail market ends up moving more; for example, when he gets scared by a sudden movement of the Nasdaq,” he evaluates. “The long-term investor in foreign assets, which has the largest assets, is not making this movement.
Curvello, from ASA, believes that the diversification process should continue, although there may still be some occasional slowdown. “People have already felt what a currency devaluation does to their investments and the problem of having all their investments in one currency.
Besides, I see no reason why Brazil shouldn’t be moving towards converging with the other emerging economies in the ratio of outside investments to GDP.”
Blanco, of Órama, adds that “Brazil has opportunities and appreciation potential, which has made money come back. Even the presidential elections are not seen by her as a risk so far.
“Yes, there may be some volatility in the market, but looking at what happened last year, in which the stock market here was the worst in the world, now with the vaccination process advanced, with the economy almost all reopened, the investor can look and think: let’s go back there because there are opportunities,” she says.
With information from Valor
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