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The wealth of markets is not the wealth of nations

. Aug 07, 2020
stock markets wealth Image: André Chiavassa/TBR

Last week, international charity Oxfam released a report designed to shock readers, stating that Brazilian billionaires increased their net worth by USD 34 billion during the Covid-19 pandemic. Their basis for this conclusion was that the financial health of the country’s richest individuals is significantly dictated by variable income, such as stocks, and markets have rallied despite the economic hardships countries are facing.

The report, however, was questioned by several economists — who accused the NGO of skewing the data to further its own agenda. Carlos Góes, a former International Monetary Fund (IMF) economist, poked several holes in the methodology,

particularly the dates used for comparison. The study measures the variation in billionaires&#8217; wealth between March 18 — when Brazil&#8217;s stock market index reached its second-lowest point of the year —&nbsp;and July 12. As &#8220;current values remain lower than those of January 1,&#8221; the notion that the billionaires got richer during the pandemic would be debunked.</p> <p>Regardless of criticisms of the study&#8217;s final conclusion, it does raise an important point for reflection: while the Brazilian economy is falling off the rails, its stock market has bounced back. Why is that?</p> <p>At the turn of the year, prospects for stocks and the economy were terrific, both in Brazil and globally. Markets predicted Brazil&#8217;s benchmark stock index Ibovespa to soar, and GDP was tipped to grow 2 percent by the end of the year. In turn, the IMF reckoned&nbsp; the global economy would grow 3.3 percent. The Covid-19 pandemic, however, tore up all of these forecasts. Unemployment spiked around the world, while production and consumption plummeted as countries halted their economies to enforce isolation measures.</p> <h2>Liquidity injections</h2> <p>To contain this tsunami of negative news, central banks around the world injected an unprecedented amount of liquidity into their respective markets, totalling some USD 15 trillion poured into the market by national monetary authorities. In Brazil, the amount topped BRL 1.5 trillion (USD 280 billion) by the end of July, between aid and asset purchases. This might have contributed to an increased value of variable income assets — and contributed to a false sensation that economies are already in recovery mode.</p> <p>Stock markets saw &#8220;<a href="https://brazilian.report/newsletters/brazil-daily/2020/05/14/high-debt-levels-prevent-v-shaped-recovery-for-brazil/">V-shaped</a>&#8221; recoveries, but national economies are <a href="https://brazilian.report/business/2020/07/30/how-brazils-economy-can-bounce-back-after-the-pandemic/">unlikely to behave in the same way</a>.</p> <p>GDP data from several countries shows a grim scenario. In Q2 2020 of the year, we saw crash after crash: <a href="https://www.euronews.com/2020/07/30/coronavirus-causes-record-plunge-in-germany-s-gdp-during-second-quarter-of-2020">Germany</a> (-11.7%), France (-19%), Spain (-18%), and the Euro Zone as a whole contracting over 15 percent. The World Bank estimates Brazil&#8217;s results for the quarter to be around -8 percent, though that forecast may be slightly exaggerated. This figure corroborates the likelihood of a slow recovery process ahead for the country, especially as the <a href="https://brazilian.report/latin-america/2020/05/25/argentinas-long-debt-default-history-imf/">public debt</a> could soon reach 100 percent of GDP. If international investors perceive carelessness in this regard, it could create a crisis of trust, though this does not appear to be the case so far.</p> <h2>Why stock markets are rallying</h2> <p>With regards to the rise in Brazil&#8217;s benchmark stock index, in tandem with the price levels of risky assets — producing several purchase opportunities — there was a significant increase in the number of retail investors, rising to 2.648 million taxpayer IDs registered on the stock exchange. Ibovespa rose 50 percent from its low point of 61,000 base points, but this increase cannot be attributed exclusively to the injection of capital, nor foreign capital, which has actually fallen by BRL 80.55 billion this year. It can, however, be put down to the higher number of Brazilian individuals who have gone after higher profitability in riskier assets.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3408026" data-url="https://flo.uri.sh/visualisation/3408026/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>The Central Bank&#8217;s repeated cuts to the Selic benchmark interest rate also plays a part. The chart below clearly illustrates the inversely proportional relationship between the volume traded on the stock exchange and the Selic rate. Whenever the monetary authority has made cuts, the financial volume increases.</p> <p>Furthermore, there is a clear correlation between the falling benchmark interest rate and the rise of Ibovespa. With a larger number of investors seeking more and more profitable assets as a result of Selic cuts, the stock exchange performs better.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3400249" data-url="https://flo.uri.sh/visualisation/3400249/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>These observations show that Ibovespa&#8217;s recovery is more down to the fall in the Selic interest rate and the influx of individual Brazilian investors, as opposed to the government&#8217;s moves to inject liquidity in the market. In fact, instead of encouraging people to put their money into the stock exchange, the administration&#8217;s measures have allowed many Brazilians to reduce their debts.

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Marco Harbich

Marco Harbich, CFP, holds a Master's degree in finance. He is CEO and CIO at NEO Finanças Pessoais, and a professor at Mackenzie Presbyterian University, in São Paulo

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