Brazil’s Record-Setting Stocks Are Testing Foreigners’ Appetite

(Bloomberg) -- The stock-market rally that made Brazil’s one of the world’s best performers last year has yet to sway foreign investors.

Foreigners pulled 4.7 billion reais ($1.2 billion) out of local equities in 2019, according to data from the stock exchange. Excluding money generated by equity sales, the outflow jumps to 44.5 billion reais, the worst since at least 2004.

While firms including Fidelity and BlackRock have been overweight Brazil equities as the benchmark Ibovespa climbed more than 30% in 2019, most offshore investors remain skittish. The slower-than-expected pace of growth in Latin America’s largest economy discouraged foreigners, burned after emerging markets from India to Argentina didn’t deliver on pledges of reforms. Local investors, hungry for returns as interest rates fall to record lows, have picked up the slack.

“Foreigners didn’t get as excited as locals about Brazil’s rally,” said Pedro Sales, a Verde Asset Management SA partner who manages local equity investments. “The Brazilian stock market has become much more compelling to domestic investors.”

Lower rates have been fueling a migration from fixed-income products to higher-yielding investments. With Brazil’s benchmark Selic now at 4.5%, from 14% just a few years ago, locals have increasingly sought alternatives to their traditional investments of government bonds and bank savings accounts. Retail investors accounted for more than 18% of local stock trading last year, the highest portion since at least 2013, according to data from the exchange.

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Early signals of accelerating growth in Brazil have been emerging in the past few months. Since gross domestic product surprised to the upside in the third quarter, retail sales, industrial production and job creation data also came in better than expected.

The year started off on a positive note for Brazilian stocks, with the Ibovespa up about 0.4%. The country’s main stock exchange-traded fund has just seen the biggest weekly inflow in seven years, and foreigners trimmed their short positions in futures contracts in the first sessions of 2020. Strategists are optimistic the Ibovespa will extend its record-setting rally, which would mark a fifth straight year of gains.

“Brazil is well poised to get a lot of investor interest going forward,” said Ray Zucaro, the chief investment officer at RVX Asset Management in Miami. He points to a combination of a stable currency, lower interest rates and compelling valuations as factors that should help Brazil stand out in Latin America, which has been dealing with increased political turbulence.

Foreigner investors are “are taking longer looks and doing their homework” when it comes to Brazil, Zucaro said.

--With assistance from Veronica Vilarinho.

To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Julia Leite, Brendan Walsh

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