May: a haunted month for Brazilian markets?

. May 06, 2019
May: a haunted month for Brazilian markets?

Among the most standard pieces of advice about investing is that past returns do not ensure future profits. However, when it comes to previous losses, investors do seem to believe in patterns. To this end, some speculators have been cautious about this month of May—which has historically been one of poor performances for Brazilian markets.

In the 24-year run between 1994 and 2018, the São Paulo stock exchange benchmark index Ibovespa has risen only eight times during the month of May. Since 2009, the month has been the textbook definition of a “bear market”—that is, when stocks are performing negatively, thus encouraging sale. According to data provided by analyst Jonathan Camargo, from consultancy London Capital consultancy, May was the worst performing month of 2010, 2012, 2016, 2017 and 2018.

In market parlance, “black swans” are events that deviate beyond what is normally expected of a situation and are extremely difficult to predict. In Brazil, these occurrences have persistently happened in May.

</span></p> <p><span style="font-weight: 400;">In 2017, a leaked audio clip of a conversation between businessman Joesley Batista, the owner of meatpacking giant JBS, and then-President Michel Temer almost brought down the government. In the leaks, Mr. Temer appeared to have condoned the payment of hush money to an imprisoned former house speaker. To remain in office and avoid prosecution, Mr. Temer used all his political muscle, essentially burying any chance of approving his pension reform bill.</span></p> <p><span style="font-weight: 400;">Last year, the month of May was haunted by a truckers&#8217; strike that nearly brought the country to a complete halt, with companies losing tens of billions due to fuel and food shortages in several areas of the country. Petrobras shares plunged and the government yielded to the truckers&#8217; demands, deciding to subsidize diesel prices—which led then-CEO Pedro Parente </span><a href=""><span style="font-weight: 400;">to resign on June 1</span></a><span style="font-weight: 400;">.</span></p> <hr /> <p><img class="alignnone size-full wp-image-17095" src="" alt="brazilian markets may" width="1200" height="1020" srcset=" 1200w, 300w, 768w, 1024w, 610w, 265w" sizes="(max-width: 1200px) 100vw, 1200px" /></p> <hr /> <p><span style="font-weight: 400;">But black swans alone do not explain all trends. </span></p> <p><span style="font-weight: 400;">For Mr. Camargo, there might be a relation between vacations in the Northern Hemisphere and Ibovespa’s poor May performance. There&#8217;s an old financial-world adage about how the &#8220;Summer&#8221; portion of the year—beginning in May—is not so good for business: “sell in May and go away.” That would explain why the drop in liquidity—leading to more volatility, including in Brazil, where foreign investors represent </span><a href=""><span style="font-weight: 400;">44.4 percent of total investment volume</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">However, despite this trend, Mr. Camargo also notices that July tends to be a very positive month for Ibovespa, so leaving the markets in May to return in October would make investors waste good opportunities. </span></p> <p><span style="font-weight: 400;">“I believe that buying in May can make a lot of sense or, if you don’t have money available, you should rotate your investments, selling the ones that presented smaller losses and buying the ones with bigger losses, or investing in cases which you are quite sure about,” he explains, </span><a href=""><span style="font-weight: 400;">in this article.</span></a></p> <h2>What to expect for May 2019?</h2> <p><span style="font-weight: 400;">At the time of publication, Ibovespa has lost more than 1.7 percent this month. This time, the stress comes from fears about the government&#8217;s ability to pass its pension reform proposal. The first meeting of the House&#8217;s Special Committee, which will analyze the bill point-by-point, is set for May 7. Observers aren&#8217;t too optimistic, after the government&#8217;s struggles to pass the bill in the House’s Constitution and Justice Committee—which was expected to be the easiest part, as it was only tasked with deciding on the constitutionality of the bill.</span></p> <p><span style="font-weight: 400;">If things have been this hard this early, we could end up with a significantly watered-down version of the bill.</span></p> <p><span style="font-weight: 400;">The Special Committee has between 10 and 40 sessions to deliberate on the matter and House Speaker Rodrigo Maia wishes to approve it on the floor before the congressional recess on July 17. However, the bill will only go to a vote once it has a guaranteed 330 votes (giving a safe margin from the necessary 308 of 513).</span></p> <p><span style="font-weight: 400;">“There is no reason why I should move things further if the government does not have the necessary votes. And there is no use concluding the work in the committee if there’s no guarantee of a 330 or 340 vote majority to approve it on the floor,” said Representative Marcelo Ramos, the special committee&#8217;s chairman, to </span><a href=""><span style="font-weight: 400;">InfoMoney</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">The long wait takes its toll on expectations as well. GDP growth projections for 2019 have been consistently cut by economists in Central Bank’s Focus studies and now hovers around 1.4 percent. For markets, lower economic growth means </span><a href=""><span style="font-weight: 400;">lower revenues for companies</span></a><span style="font-weight: 400;"> and, therefore, lower gains on stocks.</span></p> <p><span style="font-weight: 400;">According to Thiago Salomão, an analyst at brokerage firm Rico Investimentos, the uncertainties toward the reform’s approval will keep foreign investors wary of Brazilian assets until it is definitively approved. “That being said, not only we do not expect positive events for stocks related to this topic, but we are also more exposed to negative surprises in this period,” he wrote in his monthly portfolio recommendation.</span></p> <h2>External shocks</h2> <p><span style="font-weight: 400;">Another threat comes from abroad. When it seemed the </span><a href=""><span style="font-weight: 400;">U.S.-China trade war</span></a><span style="font-weight: 400;"> would come to a peaceful end, U.S. President Donald Trump threated to increase tariffs once more over the weekend. </span></p> <blockquote class="twitter-tweet" data-lang="en"> <p dir="ltr" lang="en">For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars&#8230;.</p> <p>— Donald J. Trump (@realDonaldTrump) <a href="">May 5, 2019</a></p></blockquote> <p><script async src="" charset="utf-8"></script></p> <p><span style="font-weight: 400;">His attempt to pressure the Chinese into a quick resolution made Beijing consider canceling its trade talks with the U.S. this week, </span><a href=""><span style="font-weight: 400;">sources told CNBC</span></a><span style="font-weight: 400;">. Amid the turmoil, the Shanghai Composite Index dropped 5.6 percent, while commodities markets plunged and Vix, the index that measures volatility, is heading for its biggest spike in the year.</span></p> <p><span style="font-weight: 400;">As expected, Ibovespa is not immune to external shocks and is falling alongside global markets on Monday. Prognoses are not the best, but maybe it is too soon to say that May 2019 will live up to the recent and infamous tradition.</span></p> <p><span style="font-weight: 400;"><img class="alignnone size-full wp-image-17098" src="" alt="vix bloomberg" width="1023" height="518" srcset=" 1023w, 300w, 768w, 610w" sizes="(max-width: 1023px) 100vw, 1023px" />

Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, she worked as an Editor for Trading News, the information division from the TradersClub investor community.

Our content is protected by copyright. Want to republish The Brazilian Report? Email us at