Investors ignore triple crisis and bet on equities
The recent rebound of the Brazilian stock market may surprise many investors, since the coronavirus pandemic, it seems, has not even peaked in the country. As of Monday, when it closed at 97,645 points, bellwether Ibovespa gained 11.72% this month. Yet the index is still down 18.3% from its record of 119,527 points, set on January 23. In the year, the loss is of 15.57%.
Much of the recent rally is caused by better investor mood abroad. The first signs that the worst of the pandemic is behind are pushing share prices up around the world. This shift in the mood abroad - which some analysts see as exaggerated - has even brought some foreign capital to B3, the Brazilian stock exchange. As of June 4, net foreign inflows in the month were R$2.45 billion (in the year, there were R$74.4 billion in net outflows).
Local investors have been the main driver of gains for Brazilian equities. Without many investment options, with the Selic benchmark interest rate at the all-time low of 3%, many have been opting to buy stocks, even if the local political and economic situation still cause many doubts and uncertainties. Because of the downturn caused by the pandemic, banks and asset managers predict the Selic will fall further - some forecast the rate at 1.75% in the second half.
Analyst André Rocha points to some factors to explain the recent Ibovespa rise. "Firstly, the overall sensation that the problem is serious, but has solution, is being reinforced by the gradual reopening of economies," he says. "With the Selic at a low, and falling, an internal demand for stocks that didn't exist was created," he says, referring to the flight from negligible returns from fixed-income options to the potentially higher returns with equities. "In the past, to see the Ibovespa rise, you depended on foreign investors, they were the ones supporting new IPOs on B3, and this has changed."
Marcos Assumpção, strategist and chief of research at Itaú BBA, says the future performance of stocks depends on interest rates staying low, something tied in Brazil to fiscal control with agenda of reforms and political balance. "The reforms and the political balance are very important to the sustainability of the Ibovespa rally," Mr. Rocha says. He draws attention to the fact that the trend of investors, especially individuals, going to the stock market is being seen since last year and comes from the need of alternatives that provide higher return, given the low Selic. "Even in the...
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