Foreigners Sink $12.4B into Brazilian Stocks Year-to-Date

Foreign capital inflows remained above 30 billion reais ($5.96 billion) in February despite Russia’s invasion of Ukraine

Stocks linked to commodities, such as those of Vale and Petrobras, are appreciating this year and contributing to the Ibovespa's positive performance
March 03, 2022 | 09:43 PM

São Paulo — Foreign investors have so far this year already invested around 62.6 billion reais ($12.4 billion) in the Brazilian stock market, of which 32.5 billion reais was in January and 30.1 billion in February, according to B3 data.

This positive balance, the result of purchases of shares exceeding sales by foreigners during the period, has contributes to the positive trajectory of the Ibovespa index (IBOV) in the first two months of 2022. In January, the main index of the national stock market appreciated 6.98%.

In February, during which Russia invaded Ukraine, the pace of the monthly rise was much lower, at 0.89%.

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“While 2021 was negative for the Brazilian variable incomes market, especially equities, 2022 promises to be quite different for emerging countries, especially for Brazil, despite the elections in October,” Paulo Bueno, partner and manager at Santa Fé Investimentos, an independent fund manager, told Bloomberg Línea.

Read More: Brazil Analysts Lift Inflation Forecasts as Oil Prices Climb

The Ibovespa accumulated a decline of 11.93% in 2021, ending the second year of the Covid-19 pandemic at 104,822 points (on Wednesday it closed at 115,173 points). Last year, the index hit a new historic high (130,776) on June 7, while the year’s low was recorded on December 1 (at 100,774 point)s, the lowest level since November 5, 2020, when the U.S. confirmed the first case of the Omicron variant, raising fears of a risk to the global economic recovery.

In the assessment by Santa Fe’s Bueno, Brazil has this year became the destination of resources of foreign investors in search of gains with high interest rates, with the Selic rate at 10.75% per year, and also the focus of investment opportunities due to its extremely attractive multiples, the lowest in decades, besides having become one of the nations that has most vaccinated its population and where, despite the arrival of Omicron, the pandemic seems to be under control.

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The lower mortality rate of the Omicron variant backs up the assessment that the worst is over in the management of the greatest health crisis of the century.

To March 2, 82.6% of Brazil’s population had been vaccinated with at least one dose (single or first dose), 72.3% with the complete vaccination cycle (single dose or second dose), and 30.2% with booster doses, according to data from the Ministry of Health.

The moving average of deaths fell 37.3% over the past 14 days, while the rate of new cases has dropped 58.5%, and states such as Rio de Janeiro and São Paulo have once again begun considering ending the mask mandate in public places.

"If the economy is doing well in the U.S. or is doing poorly globally, this is a trend that can be perceived. But what we predict is that the U.S. will stabilize in 2022 and that investors will start to pay attention to other markets, such as Brazil, India, Russia, South Africa and China," said Paulo Bueno, partner and manager at Santa Fé Investimentos.

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Electoral Risk

Foreign investors are attracted by Brazil’s devalued currency -- before the pandemic the U.S. dollar was below 4.50 reais and then oscillated near to six reais -- as well as the low multiples of the stock exchange and the high interest rate scenario.

“Brazil became very cheap for political and mainly fiscal reasons. However, the high interest rates here attract investors. This stands out to international eyes. It has already happened at other times, that is, there is previous evidence. The Brazilian Stock Exchange will stand out in U.S. dollar terms,” Bueno said.

The pre-electoral campaign climate that indicates a new polarization between the left and right wing is also a factor, however. Regarding the presidential race between President Jair Bolsonaro and former President Lula, with the latter leading in the latest opinion polls, Bueno said that, despite a potentially complicated scenario, with the market knowing both candidates well there should not be major shocks.

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We are optimistic about Brazil, and see room for a good appreciation in Brazilian stocks,” he said.

With Russia fighting a war against Ukraine and China with regulatory issues, Brazil has became a focus for investors, he said. “Our assets have become extremely cheap, and we are one of the largest exporters of commodities in the world. We believe that Brazil will certainly be the great destination of this investment flow”, he said.

The shares of Vale (VALE3) and Petrobras (PETR4), two blue chips tied to commodity prices (iron ore and oil, respectively), illustrate this positive movement, with the latter’s shares having risen more than 21% this year, while Vale’s shares have already appreciated more than 27%.

“The foreign capital inflow to the Brazilian stock market should continue in the short and medium term,” Bueno said.

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