Foreigners Shun Brazil’s Stock Rally, Pulling the Most Money Since 2008 Crisis

(Bloomberg) -- For Brazil stocks, 2018 was the best and the worst of times.

The Ibovespa benchmark is looking set for another year of gains -- its third in a row, something that hasn’t happened in a decade. At the same time, foreign investors have pulled almost 11 billion reais ($2.8 billion) out of Brazil stocks this year. Barring some major change of tack in the last days of 2018, it will be the biggest yearly outflow since the global financial crisis, when they took out more than 24 billion reais from the local equity market, according to data from stock exchange operator B3.

Market players have given several explanations for the outflow, both external (global jitters with growth and trade, crises elsewhere in emerging markets) and domestic (May’s truckers’ strike, the October elections and, lately, even bad press about incoming President Jair Bolsonaro.) While local investors cheered the outcome of the vote, sending stocks to fresh records on hope the former army captain will follow through with pledges to fix Latin America’s largest economy, foreigners haven’t bought into the new government just yet. It’s a stark contrast to views of Brazilians, who have never been so optimistic about the economy.

“We understand the skepticism, considering that Brazil has under-delivered on the policy front for the past decade at least,” JPMorgan strategists led by Emy Shayo wrote in report this month.

One of the main potential triggers for optimism to spread among foreign investors is progress on an overhaul of a crumbling pension system, a proposal they’ve seen fail during President Michel Temer’s tenure and which is seen as key in fixing Brazil’s deteriorating fiscal accounts. Bolsonaro’s planned reform is said to aim for savings of up to 1 trillion reais in 10 years, according to two people involved in the talks who are not authorized to discuss the matter publicly. The incoming economic team also plans to use much of Temer’s proposal, the people said, a strategy that would fast track its approval in Congress.

Bolsonaro’s relationship with Congress is being closely watched as investors assess the chances reforms are approved. Constitutional amendments, the format chosen by Temer for his proposed pension reform, need to be approved by three-fifths of lawmakers in two rounds of voting in both houses of Congress to pass. Bolsonaro’s PSL party has 52 lawmakers out of 513 Lower House members, and his strategy of not distributing cabinet posts in exchange for votes entails “considerable risk,” according to political consultancy Eurasia Group. The firm said last week that the risks of a disappointment with the reform are at about 40 percent.

Foreigners Shun Brazil’s Stock Rally, Pulling the Most Money Since 2008 Crisis

Foreigners were also responsible for most of the total trading volume in Brazilian stocks this year, doing about 50 percent of the buying and selling. Individuals accounted for some 18 percent of the trading, up from 17 percent in 2017. According to an analysis from BTG Pactual, institutional investors had the most positive contribution.

Both JPMorgan and BTG Pactual expect foreign inflows to Brazilian equities to improve next year, coming from very light positioning in 2018. BTG estimates 193 billion reais could flow into Brazil stocks, according to a report by Carlos Sequeira, Bernardo Teixeira and Claudio Ferraz.

At least for now, foreign investors are unlikely to see much concrete progress on the reform agenda: Bolsonaro takes office on Jan. 1, but Congress is in recess until February, and activity will likely slow again in early March for the Carnival holiday.

©2018 Bloomberg L.P.