A surge in foreign capital is boosting markets in Brazil, as investors seek to take advantage of double-digit interest rates, cheap assets and growing confidence in the longer-term political stability of Latin America’s largest economy.
In January, offshore investors ploughed more than R$32bn ($6bn) into local stocks, according to Bloomberg data — the second-largest monthly inflow since 2008 — amid an uptick in optimism, despite the potential turbulence of a presidential election this year.
The benchmark Bovespa share index on Wednesday reached its highest level since October, while the local currency, the real, hit 5.25 per dollar — its strongest since September last year.
The country’s main share gauge had retreated slightly by the close of trade on Thursday, while the currency weakened to about 5.3 per dollar. But the Bovespa had still added 6.6 per cent since the beginning of January, compared with a 5.6 per cent year-to-date drop for the MSCI World index, priced in dollars.
“Basically, we have a combination of highly discounted assets in Brazil — the main stock market index plummeted 12 per cent in 2021 — and a tightening monetary cycle. This is also attracting carry trade flows, which are getting more attractive to foreign investors,” said Alexandre Netto, head of foreign exchange and derivatives at Acqua-Vero Investimentos in São Paulo.
Brazil’s central bank lifted interest rates on February 2 to 10.75 per cent — the first time rates have hit double digits in almost five years — as it struggles to tamp down on inflation, which is above 10 per cent.
The Banco Central do Brasil, or BCB, has responded aggressively to price rises, raising rates eight times consecutively by 875 basis points (8.75 percentage points) since March.
“It was a bit of a surprise for us [to see] such a fast reversal [in Brazil’s market fortunes] from what was going on last year and amidst the fall in stock prices in the US,” said Evandro Buccini of Rio Bravo Investimentos.
“Most of the money seems to have gone to liquid large companies, many linked to commodities and the main reason seems to be price. They’ve fallen too much, more than what fundamentals imply. Even if you are bearish on Brazil’s macro situation, prices seemed low.”
Analysts say Brazilian markets have benefited as investors flee Russia ahead of potential economic sanctions on Moscow over its threats to Ukraine.
They also appear heartened by the dominance in opinion polls of former leftwing president Luiz Inácio Lula da Silva.
Lula, who served two terms between 2003 and 2010, is widely expected to contest elections against incumbent Jair Bolsonaro in October. Some polls give him a 20 percentage point lead, although the gap appears to be narrowing.
“Don’t shoot the messenger: people abroad like Lula and don’t like Bolsonaro,” said Rogerio Xavier, co-founder of SPX Capital, at an event on Tuesday. “Foreign investors see a chance Brazil improves under Lula.”
Tiago Cunha, a portfolio manager at Grou Capital, said foreign investors “still remember Lula’s period [of government] with growth, wealth and booming markets, and locals still perceive it and link it to corruption scandals. The foreigners’ perception, in a nutshell, is that Lula will have more political support than Bolsonaro.”
Some investors warned against underestimating the risks Brazil faced from a potentially polarising and tumultuous election.
“Looking ahead to the end of the pandemic and an eventual new [president], it should bring optimism to Brazilian businessmen and appetite for Brazilian companies,” said Fernanda Consorte, chief economist of Banco Ourinvest.
“[But] I think we will see a period of great volatility with the elections. The [election] cycle has barely begun and there are always some contentious things that arise and they will certainly bring volatility.”
