With two months left to go, 2019 is already a year to remember for Brazilian investors. The country’s benchmark stock exchange index, Ibovespa, is about to stretch its bull market[1] trend for a fourth-consecutive year—potentially reaching a growth rate in double digits. Plus, the Selic benchmark interest rate has dropped to record lows, making low-risk investments less attractive and pushing operators into variable income.

The only question is: will the party last?

</p> <p>Judging by the horizons set in October, analysts believe the economic tailwind for financial markets has every chance of being longlasting.&nbsp;</p> <p>One reason for this optimism is that after more than 20 years of debates, Congress has finally approved a reform to the country&#8217;s pension system. And while savings for the next decade are lower than ideal, it remains a <a href="https://brazilian.report/newsletters/daily-briefing/2019/10/22/pension-reform-expected-to-pass-today-in-brazils-senate/">solid and comprehensive overhaul</a>, set to clear around BRL 800 billion in public spending for the next decade. More austere management of public accounts is one of the leading driving forces for the Central Bank&#8217;s decision to slash interest rates to 5 percent a year, signaling further cuts in December.</p> <p>For companies, a healthier economy means less risk, cheaper credit, more foreign investment, and, ultimately, more profit. And all of this should reflect on these firms&#8217; share prices.&nbsp;</p> <p>“This process has just begun. I reckon we can have at least ten years of sustained economic growth because Brazil is way behind the rest of the world, and that will reflect on financial markets,” says Pablo Spyer, a director at Mirae Asset. For Mr. Spyer, after the pension reform, there are <a href="https://brazilian.report/newsletters/daily-briefing/2019/10/29/economic-agenda-post-pension-reform-brazil/">important economic measures</a> to bring investments for Brazil, such as privatizations and the tax reform, from which Brazilian listed companies are set to benefit.&nbsp;</p> <div class="flourish-embed" data-src="visualisation/850272">&nbsp;</div> <p><script src="https://public.flourish.studio/resources/embed.js"></script></p> <h2>What is to come</h2> <p>One example of the expected influx of money is the newly announced USD 10 billion investment in Brazil by Saudi Arabia’s sovereign wealth fund. The President&#8217;s Chief of Staff, Onyx Lorenzoni, was <a href="https://g1.globo.com/economia/noticia/2019/10/29/fundo-soberano-da-arabia-saudita-anuncia-investimento-de-ate-us-10-bilhoes-no-brasil.ghtml">quoted</a> as saying a council with representatives of both governments will decide where the investments should be made. However, there is a consensus that infrastructure will be the initial target—which includes a BRL 3 billion injection into the Ferrogrão railway (which connects Brazil&#8217;s soybean-producing regions to ports in the North).</p> <p>On the privatizations front, one of the most anticipated opportunities comes in the shape of auctions of airport management concessions. In a video <a href="https://twitter.com/jairbolsonaro/status/1189605656195731457">published</a> by President Jair Bolsonaro, Infrastructure Minister Tarcísio Freitas said 41 airports will be transferred to the private sector by 2022.</p> <p>“We’ll use [the money raised] to invest in local aviation. (&#8230;) We have very interesting measures that will turn our country into a market better fit for foreign investors.”</p> <p>On November 6, Brazil is scheduled to auction off exploration permissions for the massive “Transfer of Rights” deepwater oil and gas reserves—a move expected to raise at least USD 106.5 billion.</p> <p>For Mr. Spyer, the fact that the money is now coming for productive investments—not speculative financial operations in fixed income—will be part of a virtuous cycle that should reflect on variable income. He believes the influx of U.S. dollars will naturally lower the exchange rate, which currently lies at around BRL 4 per USD 1.</p> <h2>An uncertain global scenario</h2> <p>Foreign investors account for 46.25 percent of the trading volume on the São Paulo stock exchange, meaning the Brazilian financial market is always profoundly affected by international events. So far, uncertainties are pilling up: <a href="https://brazilian.report/money/2019/04/11/brexit-brazil-exports/">Brexit</a> has been delayed once more, <a href="https://brazilian.report/podcast/2019/10/30/explaining-brazil-latin-america-veins-wide-open/">political turmoil has spread in Latin America</a>, and the longlasting <a href="https://brazilian.report/money/2019/05/14/us-china-trade-war-impact-brazil/">U.S-China trade war</a> shows no sign of cooling.</p> <p>These geopolitical issues threaten global economic growth and any wave of panic abroad would certainly impact the flow of money to Brazilian assets. But, perhaps for the first time, Brazil seems to be forming a large and solid base of local investors. In October, there were 1.5 million registered investors in Brazil—an all-time record. Less than a year ago, the total was 813,000.</p> <p>However, foreign investors may no longer be in a position to run from Brazil, considering the negative interest rates set by the central banks in Japan and the European Union. As it stands, roughly one-quarter of the corporate and government debt in the world—or USD 15 trillion—is invested in &#8220;<a href="https://www.ft.com/content/820e3aac-ba1a-11e9-8a88-aa6628ac896c">negative territory</a>.&#8221;</p> <p>“That means money flowing to emerging economies. There will be an influx to Brazil, especially if growth picks up again, the inflation remains controlled, and unemployment recedes. In a world that needs yields, the Brazilian stock market is a good place to be,” says Mr. Spyer.</p> <p>Indeed, while Ibovespa rose nearly 20 percent in USD this year, the MSCI Emerging Markets Index—used to measure the equity market performance of 26 economies—is up a mere 8 percent. Currently, <a href="https://www.msci.com/emerging-markets">Brazil accounts for only 7.23 percent of the index composition</a>, behind China, South Korea, Taiwan, and India.</p> <p>So far, foreign investors appear to be shy about getting involved in the Brazilian flow. Going back to our July 24 story, in spite of the better economic scenario, Brazil still hasn’t recovered its investment-grade level, preventing many sovereign funds from applying their money here. As of October 30, Brazil’s Sovereign CDS—which measures investor’s trust in a country’s ability to pay its debts—reached 116.8 points, the <a href="https://www1.folha.uol.com.br/mercado/2019/10/risco-pais-vai-ao-menor-patamar-desde-maio-de-2013.shtml">lowest since 2013</a>.&nbsp;&nbsp;</p> <h2>Stock market: all that glitters is not gold</h2> <p>A recent study by consultancy Alvarez &amp; Marsal analyzed the balances of 374 companies listed in Brazil, ranking them according to 20 metrics such as return on investment, valuation, or profitability. They found 25 percent of them were “vulnerable” and 20 percent were “extremely vulnerable.” As a matter of fact, many companies used the 2014-2016 recession as a smokescreen to conceal deeper issues of management and governance.</p> <p>And problematic companies are not restricted to a single sector. &#8220;Our study is more about comparing companies&#8217; indicators to their peers, and we were able to find great and terrible management across the board—regardless of sector and size,&#8221; says Kevin Munier, a senior director at Alvarez &amp; Marsal.&nbsp;</p> <p>He adds that compliance has improved in recent years—after a wave of scandals that drove many heavyweight players into the ground. But companies here still face less scrutiny than in more developed markets such as Europe and the U.S.</p> <p>Another study also points in that direction. A survey commissioned by PR firm Sherlock Communications with over 200 startups found out that nearly half of them (43 percent) identify compliance regulations as the main roadblock to expanding their business abroad.&nbsp;</p> <p>The key issue here—as in any market—is information. As we&#8217;ve mentioned before, the profusion of blogs and webcasts selling &#8220;get-rich-quick&#8221; solutions has sprouted across Brazil, with investors often relying on second-hand information to make their moves. But Kevin Munier sees a positive, albeit slow trend of shareholder activism developing in Brazil. &#8220;Buying shares gives people rights [to have a say in] how the companies are run. And investors in Brazil must act for change—they can&#8217;t just passively observe the companies&#8217; controllers.&#8221;</p> <hr class="wp-block-separator"/> <p><strong>Footnote:</strong></p> <p><sup>[1]</sup> According to <a href="https://www.investopedia.com/ask/answers/bull-bear-market-names/">Investopedia</a>, &#8220;the terms <em>bear</em> (downward trend) and <em>bull</em> (upward trend) are thought to derive from the way in which each animal attacks its opponents. That is, a bull will thrust its horns up into the air, while a bear will swipe down.&#8221;</p> <hr class="wp-block-separator"/> <p><em>Correction: A previous version of this text indicated that the Mubadala Investment Co. was responsible for the USD 10-billion investment—this was incorrect, as the investment was made by Saudi Arabia’s Public Investment Fund. The Mubadala Investment Co. is Abu Dhabi&#8217;s sovereign fund. The text has been corrected.</em></p> <p>

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MoneyOct 31, 2019

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BY 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, worked as an Editor for Trading News, the information division from TradersClub investor community.

BY Gustavo Ribeiro

Gustavo is the founder of The Brazilian Report, and is an award-winning journalist with experience covering Brazilian politics and international affairs. His work has been featured across Brazilian and French media outlets.