Brazil’s stock market supported by the country’s changing political landscape

A rise 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 larger economy’s long-term political stability. from Latin America.

In January, offshore investors invested more than 32 billion reais ($6 billion) in local equities, according to Bloomberg data – the second largest monthly inflow since 2008 – in renewed optimism, despite the turmoil potential for a presidential election this year.

The benchmark Bovespa stock index hit its highest level since October on Wednesday, while the local currency, the real, hit 5.25 to the dollar, its highest level since September last year.

The country’s main stock gauge was down slightly at the close of trade on Thursday, as the currency weakened to around 5.3 to the dollar. But the Bovespa had gained another 6.6% since the beginning of January, against a drop of 5.6% since the start of the year for the MSCI World index, denominated in dollars.

“Basically, we have a combination of highly discounted assets in Brazil – the main equity index fell 12% in 2021 – and a tightening monetary cycle. This is also attracting carry trade flows, which are becoming increasingly attractive. for foreign investors,” said Alexandre Netto, head of foreign exchange and derivatives at Acqua-Vero Investimentos in São Paulo.

Brazil’s central bank raised interest rates on Feb. 2 to 10.75% – the first time rates hit double digits in nearly five years – as it strives to curb inflation, which is greater than 10%.

The Banco Central do Brasil, or BCB, has reacted aggressively to the price hikes, raising rates eight times in a row by 875 basis points (8.75 percentage points) since March.

“It was a little surprise for us [to see] such a rapid reversal [in Brazil’s market fortunes] of what was happening last year and in the midst of falling stock prices in the United States,” said Evandro Buccini of Rio Bravo Investimentos.

“Most of the money seems to have gone to large liquid companies, many of which are commodity related and the main reason seems to be price. They’ve fallen too much, more than the fundamentals imply. Even if you’re bearish on Brazil’s macroeconomic situation, prices looked low.

Analysts say Brazilian markets have benefited from investors fleeing Russia ahead of potential economic sanctions against Moscow over its threats against Ukraine.

They also seem encouraged by the dominance in the opinion polls of former leftist President Luiz Inácio Lula da Silva.

Lula, who served two terms between 2003 and 2010, is widely expected to contest the election 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,” Rogerio Xavier, co-founder of SPX Capital, said at an event on Tuesday. “Foreign investors see a chance that Brazil will improve under Lula.”

Tiago Cunha, portfolio manager at Grou Capital, said foreign investors “still remember the Lula period [of government] with growth, wealth and booming markets, and locals still perceive it and link it to corruption scandals. The perception of outsiders, in a nutshell, is that Lula will have more political support than Bolsonaro.

Some investors warned against underestimating the risks Brazil faced in the face of a potentially polarizing and tumultuous election.

“In view of the end of the pandemic and a possible new [president]this 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 election. the [election] cycle has barely started and there are always contentious things popping up and they will definitely bring volatility.

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