Bargain Hunters Flock to World's Worst Stock Market

(Bloomberg) -- Brazil’s stock-market rout has turned the country into a destination for global bargain hunters.

Local residents have been dumping equities on growing concern about the nation’s fiscal policy just as the central bank aggressively raises interest rates, sending the Ibovespa index down by more than 20% from early June through late October. 

But that collapse -- which has driven Brazil’s stock market to the world’s worst losses this year -- has started drawing in foreign buyers by pushing valuations near the lowest in a decade. 

Investors from abroad poured 12.4 billion reais ($2.2 billion) into Brazilian stocks last month, the most since June, excluding any potential inflows from equity offerings, according to exchange data compiled by Bloomberg. The shift continued into this month, with foreign buyers adding 1.7 billion reais to equities on Monday as the market rallied off its lows.

The influx has come as JPMorgan Chase & Co. sees the Brazilian market nearing a bottom, potentially offering the best entry point “we will encounter in a while.”

The Brazilian stock drop stood in stark contrast to other equity markets, where prices have surged this year even in the face of mounting inflation, supply-chain bottlenecks and anticipation of a slowdown in economic growth. 

That has made Brazil look like a haven from lofty valuations. The Ibovespa index is trading at around 8 times 2022 earnings, according to data compiled by Bloomberg. That’s about half the valuation of the Euro Stoxx 50 Index, a Eurozone benchmark, and roughly one third of the S&P 500’s.  

Malcolm Dorson, a money manager at Mirae Asset Global Investments in New York, said some of the movement into Brazil has come from portfolio managers cutting exposure to China after the country’s real estate downturn. 

“Many funds need to reallocate assets after trimming down exposure to China and they are now seeing Brazil trade at 2.6 standard deviations below its historical average,” Dorson said.

Yet the outlook for Brazil is clouded by the increase in interest rates and next year’s presidential elections. In the face of those uncertainties, local investors have been shunning risk, accelerating the outflows from local investment funds and exerting a drag on the market.

The nation’s currency, the real, weakened some 3.4% against the dollar in October, the most of 31 major currencies tracked by Bloomberg after the Turkish lira, though it rallied sharply on Wednesday. Some foreign investors may have been taking advantage of the exchange rate to buy Brazilian assets, but for foreign inflows to pick up in a more substantial way the real would need to stabilize, said Carlos Botelho, the chief investment officer at Limiar Capital Management in Arlington, Virginia.

“I would not expect the foreigners to be the ones driving the stabilization of the market but rather the locals turning less pessimistic,” he said.

Moreover, Morgan Stanley strategists led by Guilherme Paiva argue that Brazilian stocks are not yet cheap enough: They say the price-to-earnings ratios are thrown off by the record profits of commodity producers that have a high weighting in the market’s main benchmark. 

But the news on Brazilian corporate earnings has largely been positive. Of the 24 Ibovespa companies that have reported quarterly results, 82% have met or exceeded earnings estimates. The market has also at least temporarily halted its slide, with the Ibovespa rising more than 2% from the yearly low hit on Oct. 29.

“It’s clearly still a fluid situation, but investors are seeing many quality names sold off with the bad, which makes for good entry opportunities,” said Dorson, the money manager at Mirae.

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