Recent data from the Sao Paulo stock exchange showing that foreign investors have been withdrawing funds from Brazilian stocks at record pace this year.
In total they have pulled out a net BRL15.2bn, with foreign investors reducing their stock holdings by $578m this month alone, the Financial Times reports. At the same time, Brazil has seen net inflows into equity funds for 2019 reaching decade highs.
Alongside this seemingly contradictory data, the Brazilian stock markets appear to be telling a story of bullish optimism.
The benchmark Bovespa has surged more than 30% this year (through 18 December), jumping from a price of around 87,000 at the start of the year record highs around 14,000. The emerging-market has been rising steadily since 2016, when it was languishing around 38,000, and has seen solid gains in the last quarter. The iShares MSCI Brazil ETF [EWZ] has outperforming other major EMs over the past month with an 8.7% gain.
Increase of Bovespa index since start of this year
Similarly, ETFs tracking Brazilian companies have seen strong performance in 2019, amid gains from other emerging market ETFs. What is happening in Brazil, and how does it compare to these emerging markets?
A growth story
The nation’s GDP rose by 0.6% quarter on quarter in the 3 months to September 2019, its strongest growth rate since the first quarter of 2018, according to data from Trading Economics. It has grown 1.2% on a yearly basis, beating forecasted expectations of 1% growth boosted by strong performance in services (in particular financial services), industrials, trade and agriculture.
The economy has also been helped by record low interest rates of 4.5% Between 1999 and 2019, this averaged 14.73% Trading Economics states. This has led to a recovery in domestic consumer spending.
The growth story is expected to continue too, as most economists polled by the FT forecast that GDP would grow 1% this year and increase to more than 2.2% next year, while they set inflation at 3.4%.
Meanwhile, Brazilian stocks are on a bullish run, and Brazilian focused ETFs have been performing well. The iShares MSCI Brazil Capped ETF [EWZ] is up 24% this year, rising from $37.21 to $46.19 (as of close 18 December). This is 7% higher than the 17.25% gains seen from the iShares MSCI Emerging Markets [EEM], which tracks emerging market stocks.
The iShares MSCI Brazil Small-Cap ETF [EWZS] has registered even better performance, jumping 35% YTD from $13.99 to $20.25 . It has a YTD Daily Total Return of 41.57%.
iShares MSCI Brazil Small-Cap ETF's YTD rise
These gains were just short of those seen by other emerging market ETFs. For instance, the iShares MSCI Russia ETF [ERUS] is up 46%, while the Global X MSCI Greece ETF [GREK] rose 46.3% YTD and the VanEck Vectors ChinaAMC SME-ChiNext ETF [CNXT] is up 40.9%.
There has of course been losers. The iShares MSCI India ETF (INDA) rose only 6.6% throughout the year after the country saw its own investor exodus earlier this year. Meanwhile, the iShares MSCI Chile Capped ETF (ECH.MX) that tracks large capped company’s in Chile – currently in the grip of protests and civil unrest over the cost of living in the country – dropped 23% in 2019.
Brazil’s inflow/outflow dichotomy
Back to Brazil, in 2019 Brazilian equity funds saw a net inflow of BRL47.7bn for the year through to September, research from Bloomberg in October showed. This was the highest total for any year since data began being tracked in 2006.
“Lower rates are leading to growing inflows to equity funds, but this move is just getting started,” Marcos Peixoto, the co-head of equities at Sao Paulo-based XP Asset Management, told the publication. “It’s a trend that will last for years,” he predicted.
“Lower rates are leading to growing inflows to equity funds, but this move is just getting started. It’s a trend that will last for years” - co-head of equities at Sao Paulo-based XP Asset Management, Marcos Peixoto
This surge in inflows was being led by local investors spurred on by low-interest rates and “taking their money from government bonds and low-yielding savings accounts to invest with hedge funds and equity funds,” according to Bloomberg.
Simply put, foreign investors are sceptical about whether the Brazilian economic recovery can be sustained. “Foreign investors are looking for reality rather than rhetoric,” Greg Konstantinidis, a portfolio manager at Fidelity International told the FT. “High unemployment and low capacity utilisation are signs of a weak economic growth backdrop.”
“Foreign investors are looking for reality rather than rhetoric. High unemployment and low capacity utilisation are signs of a weak economic growth backdrop” - portfolio manager Greg Konstantinidis
There is also growing concern at the political direction being taken by Brazilian president Jair Bolsonaro, in particular, his views about global warming and an intention to open up the Amazon for more development, which some feel could run the risk of further hampering foreign investment.
According to Morgan Harting, portfolio manager at AllianceBernstein, foreign investors have not yet “re-risked their Brazil exposure,” because of “a combination of global portfolios just being more defensively positioned and some scepticism about how much more room to run there is in Brazil, particularly since the headline GDP growth rate still seems pretty sluggish.”