Why does Brazil have so few retail investors?

. Feb 16, 2019
Lack of savings, a concentrated banking sector and low levels of financial knowledge dissuade Brazilian investors from putting money into the stock market.

Financial markets are already calling 2019 “the year of stocks in Brazil.” So far, the Bovespa benchmark index is just short of a historical peak of 100,000 base points, while interest rates at all-time low levels give very little return for fixed-income investors. But will this scenario be enough to make Brazilians finally lose their fear of riskier investments?

Judging by 2018’s performance, optimism is growing. Not only did Ibovespa gain 15 percent over the year, making it the best performer in Latin American markets, but the number of active investors in B3, São Paulo’s stock exchange, jumped 37.1 percent from 2018 to 880,300 last month. Yet, the number of investors is still comparatively small for a country of 200 million people. In the U.S., a global reference for capital markets, more than half of the population has at least some money invested in the stock market.

</span></p> <p><span style="font-weight: 400;">The different path of these economies may explain why Brazilians are still shy when it comes to riskier investments. The country has staged a historical </span><a href=""><span style="font-weight: 400;">battle against hyperinflation</span></a><span style="font-weight: 400;"> and shocks caused by </span><a href=""><span style="font-weight: 400;">foreign exchange crises</span></a><span style="font-weight: 400;">. Traditionally, raising interest rates has been Brazil&#8217;s go-to strategy to try to stabilize the economy. For example, in 1999, the Selic benchmark rate reached its historical peak of 45 percent per year, while the country sought out the International Monetary Fund for loans. </span></p> <p><span style="font-weight: 400;">“Low-interest rates are a new thing in Brazil. This record number of investors is related to that. We are still far away from other countries such as the U.S. But you have to consider that they are a mature economy, and have had low interest rates for a long time. We have just started to talk about it.” explains Rebeca Nevares, a partner at brokerage firm Ativa Investimentos.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-14134" src="" alt="Lack of savings, a concentrated banking sector and low levels of financial knowledge dissuade Brazilian investors from putting money into the stock market." width="1024" height="654" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">Brazil&#8217;s historically unstable economy leads people to sacrifice possible gains for the comfort of not risking their capital. In fact, </span><a href=""><span style="font-weight: 400;">data from Anbima</span></a><span style="font-weight: 400;">, a capital markets entities association, shows that for 54 percent of Brazilians, the most important aspect of investment is security. Only 16 percent favor profitability and 12 percent prefer liquidity.</span></p> <p><span style="font-weight: 400;">This combination explains why savings accounts, the oldest investment in Brazil, remains the most popular, gathering as much as </span><a href=""><span style="font-weight: 400;">65 percent of the total portfolio</span></a><span style="font-weight: 400;"> for retail investors. Also, there are little costs and no fees to maintain a savings account, which is attractive for the lower-income population. </span></p> <p><span style="font-weight: 400;">But that doesn’t mean that Brazilians are savers. In fact, </span><a href=""><span style="font-weight: 400;">a study</span></a><span style="font-weight: 400;"> from the World Bank revealed that 60 percent of Brazilian adults who own a bank account do not save at all. In high-income economies, the average is 26 percent. </span></p> <p><span style="font-weight: 400;">A higher level of savings is positive for stock markets, providing people look to diversify investments when money is available. </span><a href=""><span style="font-weight: 400;">As mentioned by</span></a><span style="font-weight: 400;"> the World Federation of Exchanges, “countries with higher GDP growth rates and/or greater individual savings rates show – on average – greater breadth and depth of retail participation in the equity market.” </span></p> <p><span style="font-weight: 400;">But, as Ms. Nevares mentioned, even if you are able to save in Brazil, there is another roadblock: </span><a href=""><span style="font-weight: 400;">the concentration of the banking sector</span></a><span style="font-weight: 400;">. In Brazil, five major banks control 82 percent of the assets. These institutions charge higher fees to invest in equity and traditionally offer different products to their clients, such as insurance or private pension plans.</span></p> <p><span style="font-weight: 400;">“Banks do not talk about investments as they should. When the client is going to invest, he or she meets an institution that does not provide the tools. But I believe we are in a transition phase: there are large banks buying brokerages and lowering—or even not charging—fees for people investing in Brazilian bonds.&#8221; </span></p> <p><span style="font-weight: 400;">Indeed, higher demand for securities also leads to higher supply, helping to broaden the market. According to Brazil&#8217;s securities commission (CVM), the number of registered market entities—including companies, funds, and brokerage firms—grew by 4.2 percent last year, to more than 50,000.</span></p> <p><span style="font-weight: 400;">A larger number of market participants, coupled with more compliance and regulation from government organs is positive to ensure investors that they will be protected if something bad happens. “People think that if they put their money in a brokerage, it may go bankrupt and they will lose everything, but it is not like this. There is the CVM, the Central Bank, plenty of agencies which guarantee compliance”. </span></p> <p><b>Perspectives </b></p> <p><span style="font-weight: 400;">Market expectations for Brazil with regard to a new growth cycle, boosted by macroeconomic reforms, are pretty positive. But to grab an opportunity, one first has to know how to identify it. Unfortunately, Brazilians have </span><a href=""><span style="font-weight: 400;">very little knowledge of finance</span></a><span style="font-weight: 400;">: there is no public policy toward financial education in schools. Even in private institutions, this is still rarely explored, certainly not in any meaningful depth.</span></p> <p><span style="font-weight: 400;">The recent recession made the lack of knowledge even more evident. With unemployment on the rise, </span><a href=",brasileiros-comecam-o-ano-mais-endividados-e-inadimplentes-que-em-dezembro-de-2018,70002708543"><span style="font-weight: 400;">indebtedness bumped as well</span></a><span style="font-weight: 400;">. It doesn&#8217;t seem to have gotten much better: as of January, 60 percent of Brazilian families have debts and 23 percent are defaulting on them.</span></p> <p><span style="font-weight: 400;">So far, the market has tried to fill the gap left by the lack of public policies, helped by the internet. Many brokerages have been investing in online educational platforms, such as XP Investimentos or Rico. Financial YouTube channels are among the most popular in the country and fintechs such as financial planning app Guia Bolso are growing.  </span></p> <p><span style="font-weight: 400;">This increasing amount of information is more important than ever. If the </span><a href=""><span style="font-weight: 400;">fiscal adjustment</span></a><span style="font-weight: 400;"> is seriously implemented and the economy gets back on track, considering current low inflation, interest rates should fall even further, at 5.5 percent, says Daniel Alberini, investment manager at CTM Investimentos. </span></p> <p><span style="font-weight: 400;">He believes that, if the positive scenario does materialize, it may be a milestone for the Brazilian market. However, it will take time to tackle the biggest problem: the Brazilian mindset. </span></p> <p><span style="font-weight: 400;">“I think the retail investor profile is still very volatile in Brazil. They buy stocks, make a profit and quickly leave if they get scared. It will remain like this until a mindset change takes place. (&#8230;) People got used to 15 percent of return without any effort. But with lower rates, they will have to educate themselves and this knowledge will make them more able to better understand risks.”

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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