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Brazilian retail investors set to have access to global stocks

. Aug 26, 2020
Brazilian retail investors set to have access to global stocks Photo: MaD Checkpoint/Shutterstock

Brazil’s lowest-ever benchmark interest rates propelled the number of individual investors trading on São Paulo’s B3 stock exchange to triple to almost 3 million in the past twelve months. Not even the pandemic sell-off and the fact that benchmark stock index Ibovespa remains in the red have scared the newcomers away. At the same time, new Brazilian investors are becoming keener on diversifying, which fuels regulatory responses to make markets more accessible, including foreign assets. In the latest move in this direction, the Brazilian Securities Commission (CVM) has decided to allow ordinary retail investors to purchase Brazilian Depositary Receipts (BDRs) as of September 1.

</p> <p>These are negotiable instruments traded on B3 and backed by shares of foreign companies. </p> <p>Previously, only qualified investors with more than BRL 1 million in net worth had access to these stock equivalents of global giants such as Alphabet, 3M and Coca-Cola. Now, regular Brazilian investors will also be able to increase their exposure to foreign economies and get protection from local market swings, as BDR prices also take forex rates into account.</p> <p>In a press statement, CVM chairperson Marcelo Barbosa said the new rule “provides investors and issuers with more freedom, in the wake of a growing demand for portfolio diversification and lower interest rates.”</p> <p>However, it is important to note that it might take a little longer for BDR trading to be available for all investors, as B3 will require approval from the securities commission to change its internal regulations. <a href="https://valor.globo.com/financas/noticia/2020/08/11/b3-preve-que-corretoras-passem-a-oferecer-bdr-a-pessoa-fisica-em-setembro.ghtml">According to</a> newspaper Valor, stock exchange managers believe this could happen by the end of September, but no dates have been confirmed. Also, brokerages need time to include the assets in their home broker systems.    </p> <p>In a recent column, Levante Investimentos stocks expert Eduardo Guimarães considered the availability of BDRs to be a “second wave of growth in the share of variable income in Brazilians’ net worth,&#8221; despite minor timing issues.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3578293"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <h2>Fishing in a tiny pond</h2> <p>According to data by Economatica, the average daily trading volume of BDRs has been on the rise in 2020, reaching BRL 59.8 million per day — a 267-percent increase on 2019’s daily average. In March, volumes peaked at BRL 75 million. The vertiginous devaluation of the Brazilian Real this year has bolstered BDRs&#8217; performance, but volumes spiked 190 percent even in USD terms.&nbsp;</p> <p>Nevertheless, the BDR market remains far less active than Brazilian stocks. As a comparison, AMZO34, Amazon.com&#8217;s BDR — which Economatica rates as having the highest liquidity — trades only BRL 3.7 million per day; meanwhile, negotiations of shares of domestic retailer Magazine Luiza top BRL 1 billion during the busiest trading sessions.&nbsp;</p> <p>It is worth mentioning that BDRs are often more expensive than Brazilian stocks. AMZO34 was worth BRL 8,700 as of August 17, and a standard lot currently consists of 10 BDRs. B3 is reportedly considering the creation of a fractional market to make these assets more accessible.  </p> <p>As <a href="https://exame.com/mercados/volume-de-negociacao-de-todas-as-bdrs-nao-supera-a-de-uma-acao-do-ibovespa/">reported</a> by magazine Exame, B3 will use market makers — institutions that trade their own stocks to provide liquidity to developing markets — to boost BDRs. Still, analysts believe that it may not be enough, especially considering that many brokerage companies are directly offering accounts to Brazilians in the U.S.&nbsp;</p> <p>“It helps to have a market maker, but liquidity will always be bigger abroad. So, the variation of BDRs will never be exactly like the stocks themselves. It&#8217;s subject to what investors are willing to pay,” said analyst Victor Savioli.&nbsp;</p> <p>In his report, Mr. Guimarães points out liquidity as an issue, saying it may take a little longer for BDR trading to pick up steam. He also mentions that there may be language barriers, and investors could be overwhelmed with the vast array of options available. Still, he believes that the appetite for technology stocks such as the FAANG group (Facebook, Amazon.com, Apple, Netflix, and Google) and the increased access to financial education may drive up the demand over time.&nbsp;</p> <h2>What’s next for investors?  </h2> <p>Companies such as Guide Investimentos — one of the largest independent brokerage firms in Brazil — have already pledged to make BDR trading available on their home broker platforms and publish theoretical portfolios for clients who wish to invest in them.&nbsp;</p> <p>Also, the changes mean Brazilians will have access to local tech companies that preferred to be listed abroad, with the most famous case being financial services firm XP, Inc. In December, when the company became publicly traded in New York, it was heavily criticized for not allowing the majority of its customers to become shareholders. Later on, it created a fund offering its shares to meet the demand. According to XP, Inc.’s Chief Financial Officer Bruno Constantino, the company will list its BDRs on B3 as soon as possible, <a href="https://www.infomoney.com.br/mercados/bdr-da-xp-inc-deve-ser-listado-na-b3-o-quanto-antes-diz-diretor-financeiro/">reports</a> InfoMoney.  

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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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