Brazilian stock exchange heading toward worst global performance in 2021

RIO DE JANEIRO, BRAZIL – A strong deterioration in the Brazilian economy’s fundamentals is paving the way for the Brazilian stock market to close the year at the bottom of the list of the world’s main indexes.

With the rise in interest rates in the domestic market, a direct effect of soaring inflation, investors who throughout last year increased their stake in variable income, in search of a higher yield, changed direction and reverted to the well-known (and safer) fixed-income investments.

In addition, this scenario is likely to be compounded by the upcoming heated and polarized presidential elections, expected to lead to great market volatility.

NEGATIVE TURNAROUND

Investors’ mood has mostly reversed direction in the past 3 months, after the expected upturn in the national economy failed to materialize. This was reflected in the continuous revisions of the Gross Domestic Product (GDP) projections for next year by financial institutions. Last week, the announced technical recession after a negative third quarter GDP confirmed the reasons for pessimism.

“In June, when the stock market peaked at 130,000 points, there were expectations of strong economic growth, of transitory inflation that would not force interest rates to rise as much, in addition to expectations of reforms advancing. Since then, it has deteriorated on all fronts,” says XP chief strategist Fernando Ferreira.

The executive states that the distrust with the federal government’s fiscal commitment worsens the scenario, aggravated since the flexibilization of the public spending cap.

Ibovespa’s performance is an indication of the expectation of weak GDP growth next year in relation to other emerging countries. According to International Monetary Fund (IMF) data, Brazil should grow 1.5% in 2022, compared to 2.5% in South Africa and 2.5% in Chile, for instance.

However, the Fund’s projection is much more optimistic than the estimates of other financial institutions. In the Central Bank’s Focus report, which consults dozens of players in the financial market, Brazil’s GDP growth forecast for 2022 is at 0.58%.

FLIGHT

Investors’ flight from the stock market is now evidenced in figures. Data from the Brazilian Association of Financial and Capital Market Entities (ANBIMA) show that stock funds registered withdrawals of over R$8 (US$1.4) billion in October and November, reverting a positive sequence that began in February. On the other hand, fixed income funds registered a positive inflow of over R$50 billion in the same period.

As a result, since early June, when Ibovespa reached the highest point in its history, the market value of all companies listed on B3 fell by R$1.33 trillion, according to Economática data.

Trafalgar partner Igor Lima points out that companies’ performance was still positive, with good results in the third quarter due to high demand after the end of the social isolation period. “But 2022 will be a more complicated year, fiscal and macro risks have greatly increased, which places the fundamentals of companies in doubt,” Lima says.

OTHER MARKETS

At Wealth High Governance (WHG), a global investment manager, Brazil’s portfolio share, which reached 10% of the total in April, has been dropping and is now below 5%. In the opposite direction, China has been growing, despite its not very positive performance this year due to the Chinese government’s interventions in the economy, says WHG portfolio co-manager Daniel Gewehr.

“Investors are looking for above-market average growth in emerging markets. If one is slowing down, it loses that quality,” says Gewehr. In his opinion, by placing on the table only the stocks regarded as good quality by the manager, there are more attractive perspectives than those currently offered in Brazil.

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