Investors abandon risk, a movement affecting the market and Brazil

RIO DE JANEIRO, BRAZIL – The last few days brought bad news for stock markets around the world. As could not be otherwise in a highly globalized capital market, the impact was repeated in Brazil, even with the privatization of Eletrobras, the largest sale of shares in the country in a decade.

The Ibovespa index closed down for eight straight days until Tuesday, June 14th, with some recovery the following day. Such a disaster for investors had last happened in September 2015.

At that time, the justifications for the consecutive drops were credited to political and economic uncertainties in the country, expectations of rising interest rates in the United States, and apprehension about a slowdown in the Chinese economy.

The same reasons can be transposed to the present day. And, as happened seven years ago, such a combination is a danger for emerging markets, such as Brazil.

The most pressing fear this time revolved around the decision of the central banks of the United States and Brazil to raise interest rates to control rising inflation in both countries, scheduled for Wednesday the 14th.

As the entire market had expected, the two economies showed that rates should continue to be raised for a longer time, perhaps with more intensity.

The Federal Reserve, the central bank of the United States, made an official increase of 0.75 percentage points.

An interest rate hike of this magnitude had not occurred since 1994. It was an indication that the monetary authority agreed that a stronger tightening, perhaps even pushing the economy into recession, would be necessary to hold down inflation.

A few hours after the Fed’s announcement, it was the Central Bank of Brazil’s turn to raise the Selic rate for the eleventh time in a row. The rate rose 0.5 percentage points to 13.25%, its highest rate since December 2016.

The institution also warned that the hikes might not have ended. Large banks and investment houses are already considering the need for a Selic around 15% to 16% to bring inflation to the target in 2023.

If, on the one hand, these decisions by central banks indicate that they are indeed committed to controlling prices, there is another major cause for concern.

Interest rate hikes like these, considered too strong for the American and the Brazilian economies, usually deteriorate growth prospects.

They mean a bucket of ice for both countries that were recovering well in the first half of the year, with consumption on the rise from the crisis caused by Covid-19. And they also yield a real turnaround in the financial markets.

The interest rate hike in the United States caused a mass flight from risky assets all over the planet, leading investors to unleash a race for the safety of certain gains.

After all, why run the risk of having your money tied up in investments that can abruptly lose value if the world’s largest economy guarantees higher interest payments through its public bonds, considered the safest investment in the world? The result is a movement that experts call the flight to safety.

“With interest rates rising in the United States, people tend to seek protection in countries whose economy is stable and in fixed-income investment modalities, in contrast to variable-income ones,” explains VanDyck Silveira, CEO of Trevisan Escola de Negócios.

By making this movement en bloc, investors drop the value of everything with a minimum risk indicator, causing real impacts in three major spheres – that of countries, investment classes, and company shares.

In the first of these, investments in emerging countries are drastically reduced, leading the dollar to appreciate against the currencies of these nations.

It is a trend that has already been verified in Brazil. After appreciating the increase in commodity prices resulting from the war in Ukraine, the Brazilian real has lost strength again.

If the dollar was around R$4.70 at the end of May, it has now returned to over R$5.

“The dollar will benefit from refugee flows, and the upward trend of the American currency should continue,” says Edward Moya, financial market analyst at New York-based brokerage Oanda.

Another sign that the country has become too risky is perceived in the B3. In April, the São Paulo stock exchange registered its first negative balance of the year in the flow of foreign investments, after three months of international money coming in on the back of the rise in commodity prices.

That month, in anticipation of what was to come, foreigners took away R$7 billion (US$1.4 billion) of the funds invested. Since then, what was bad has gotten worse.

The withdrawal reached R$13.7 billion in the first two weeks of June.

With the market in a frenzy, investment categories with high speculative content, such as cryptocurrencies, are particularly affected.

Bitcoin, the main one, has already accumulated more than 60% loss for the year. After hitting a record high of US$69,000 in November last year, it was trading below US$25,000 at the beginning of last week.

In this case, the prospect of high profitability is sacrificed for lower volatility and greater security as protection against turbulence. The same phenomenon is noticeable in the stock market.

In the United States, with the shadow of recession hovering on the horizon, what Wall Street calls the bear market has taken hold, characterized by a very low level of operations, after presenting a drop of more than 20% compared to the most recent peak.

It is the opposite of the bull market, of aggressive gains, in which investors take more risk.

Before a slight recovery on Wednesday, the S&P 500, an index composed of shares of 500 large companies on the New York Stock Exchange and Nasdaq, had closed in the red for five consecutive days, accumulating a drop of 21.63% compared to the highest point in January. Since then, the loss has been US$9.3 trillion.

In this scenario of apocalyptic tones, the big losers are the companies focused on technology and innovation. During the pandemic and the bull market that followed it, the value of these companies exploded.

Governments poured trillions of dollars into the economies, which encouraged the search for businesses with greater capacity to expand at the expense of more stable growth companies.

Now, the money for such companies has dried up. Shares of Netflix and Meta, owner of the social networks Facebook, Instagram, and WhatsApp, have already lost more than 50% in value by 2022.

Other big names, such as Tesla, owned by Elon Musk, and Amazon, owned by Jeff Bezos, have also felt the impact.

In Brazil, in addition to the devaluation of technology companies on the B3, there have been mass layoffs in recent weeks in companies focused on innovation, such as QuintoAndar, Kavak, and Loft, among others.

The near future is worrying for the employees of these companies, investors in technology, and emerging countries.

With information from Veja