Should investors "buy Brazil"?
Should investors "buy Brazil"?

Should investors “buy Brazil”?

As the U.S. dollar continues to rise against emerging currencies, assets in countries such as Brazil have become much cheaper – and thus more attractive – for international investors. But does it make sense to take the risk and buy Brazilian stocks at this very moment? And if so, how to overcome bureaucracy and get the green light from the local authorities? What about the taxation over the gains?

The Brazilian Report tries to answer these and other questions to make the life of those who want to invest in Brazilian assets a bit easier.

How strong is the dollar?

This Wednesday, the U.S. dollar closed at BRL 3.83, the highest level since March 2016. Not even interventions from the Brazilian Central Bank have been able to prevent the depreciation of the Brazilian Real in the past couple of weeks. The American currency has already gained 22 percent over the Brazilian currency in comparison to its lowest point in 2018 – at BRL 3.14, on January 24.


US Dollar against Brazilian Real


The increasing uncertainty is directly linked to the general elections set to take place in October. The main presidential candidates have given few clues about their economic proposals. None of them has publicly committed yet to the pro-market agenda President Michel Temer has failed to implement to the fullest. Afraid of what might take place – and attracted by the promise of higher interest rates in the U.S., investors have taken their money elsewhere.

The rise of the U.S. Dollar is directly linked to another significant trend in the local markets: Ibovespa, Brazil’s main stock market index, has fallen over the past weeks and closed this Wednesday near its lowest level in the year, at 76,117 points.

Combined, the two movements mean one thing: Brazilian stocks are getting cheaper in general and considerably cheaper for international investors.

Ibovespa’s performance over the past three months make that very clear: While the index fell by 10.5 percent between March 6 and June 6, its version denominated in U.S. Dollars crashed 26.6 percent. That is, when taken into consideration the currency variation in the period, Brazilian main stocks are worth on average only three-quarters of the value they had three months ago.


Ibovespa performance in BRL and USD, in %


Suno Research, a Brazilian investment consultancy firm, points out this scenario highlights some good opportunities for investors. A survey developed upon The Brazilian Report’s request shows the variation of the prices of six stocks (in U.S. Dollars) and illustrates how much cheaper they have become since March.

The first two, with sharper decreases, are Banco do Brasil (BBAS3) and Petrobras (PETR4), Brazil’s largest state-run bank and oil company. In the past three months, they became 43,6% and 36% cheaper for international investors respectively.

The problem, Suno Research warns, is that these two stocks are more likely to be impaired by the uncertainty related to local politics. Also, the government is expected to announce a definitive decision regarding Petrobras’s controversial pricing policy, which will surely affect the company’s shares. The issue was one of the reasons behind a truck drivers’ strike that led to the resignation of the company’s former CEO Pedro Parente, as The Brazilian Report has shown.

What Suno Research highlights, on the other hand, is that amid this turbulent scenario which has brought the prices of most of the stocks down, some solid companies with positive perspectives have also become cheaper – and thus might be good investment opportunities. The list below was compiled by the consultancy firm and illustrates the case.

Bradesco (BBDC4), Brazil’s second-largest private bank, had its stock price fall from USD 11.19 on March 6 to USD 7.53 on June 5, a 32.7 percent drop.

Itausa (ITSA4), the holding that controls Itaú Unibanco, Brazil’s largest private bank, declined 31.4 percent in the same period, from USD 3.88 to USD 2.66.

Ambev (ABEV3), the country’s largest brewing company, a subsidiary of Anheuser-Busch InBev is 27 percent cheaper now, at USD 5.18, from USD 7.09 three months ago.

ABC Brasil (ABCB4), an investment bank, now has its stocks traded at USD 4.26, a value 26.8% lower than the USD 5.83 registered in March.

But how simple is it for a foreigner to access Brazil’s financial market?

Foreigners already make up more than 50 percent of all stock investments and account for about 40 percent of the derivatives market in the country, according to B3, the Brazilian stock exchange.

To become a non-resident investor – as financial jargon defines it – you must be registered with the local regulatory authorities: The Securities and Exchange Commission (CVM), the Brazilian  Central Bank (BCB); the Brazilian Federal Revenue Service (Receita Federal), and B3 itself.

Foreigners can access the Brazilian financial and capital markets both directly, by establishing a relationship with a Brazilian broker, or via international brokers, asset managers, or intermediaries.

To do so, they must meet at least four requirements. As bureaucratic as it may sound, all of them have most to do with choosing one financial institution to operate in Brazil.

1. Designate a legal representative

This appointee must have powers to manage assets through the Brazilian federal tax authority, make sure the investments comply with the local legislation and, if necessary, receive court citations, subpoenas and judicial notifications on behalf of the non-resident investor. The legal representative is also the one in charge of the registrations with local authorities.

2. Designate a tax representative

While the legal representative will proceed mostly with the necessary arrangements with the Central Bank and CVM, the tax representative will deal more directly with the Brazilian tax authority. Although it represents another bureaucratic measure, most investment institutions offer both services at once.

3. Designate a Local Custodian

The custodian’s duty is to hold the foreign investors’ assets and securities, keep their identification data and supporting documentation and provide monthly statements to the local authorities about the state of the securities.

As B3 notes, it is also “not uncommon for the same institution or institutions belonging to the same financial conglomerate to act as Legal and Tax Representatives as well as Local Custodian” for the non-resident investor. To ensure investors are able to meet the legal requirements within the legal boundaries, CVM lists all the 146 local custodians authorized to operate in the country.

4. Choose a Local Broker

The local broker is the institution which will execute the investors’ trades. Therefore, it is obliged to provide information to customers on all executed trades, holdings and positions both in cash and securities, identify the final beneficial owner in all trading orders, offers and transactions.

According to B3, there are currently 26 financial institutions authorized to work as local brokers for foreigners, among them local and international investment banks, and brokerage firms. This file produced by B3 provides all the detailed information for foreigners interested in investing in the Brazilian stock market.

In short, either via a local or an international financial institution, the important thing is to make sure the company offers all four of these services listed above. With all these boxes checked, foreigners will get the green light to trade on the Brazilian stock market.

DIY

After all the registration process, if the choice is not to trade via the broker-dealer’s desk, non-resident investors can use Direct Market Access system to connect to B3’s platform directly and place the orders to sell or buy assets by themselves. In this case, the only requirement is to choose from three distinct types of connectivity to the trading system: through a provider/vendor; a broker co-location; or an investor co-location.

Taxation

There are two different tax regimes for foreigners. Their capital gains can be tax-free if they come from countries where the tax income is higher than 20 percent and they made money by trading equities, derivatives and corporate bonds, or had gains from distributed profits and dividends in Brazil. On the other hand, if the tax income in their home country is lower than 20 percent, then they are treated as a Brazilian investor for taxation purposes.

In this case, it can range from 15 percent in applications in equity funds, swaps and operations future markets up to 25 percent over the interest on stockholders’ equity. In the fixed income and derivative markets, the tax varies according to the duration of the investment. All the details regarding taxation policies can be found on this link.

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MoneyJun 07, 2018

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BY Mario Braga

Braga is a journalist from São Paulo. He is an Erasmus Mundus Journalism scholar pursuing his Master’s degree at Aarhus University (Denmark) and at the London’s City University.