Is the love affair between foreign investors and Brazilian equities on the wane? While the flight to safety has affected equity markets around the world, Brazil has been taking it to the chin more than others.
Equity funds pulled $1.03bn out of Brazil this May, according to data from EPFR Global. That is more than 1 per cent of the funds’ Brazilian equity holdings at the beginning of the month and is the biggest monthly outflow since August 2011.
Compare this to China, India and Russia, which respectively saw outflows of $913.4m, $422.5m and $627.9m during the period. Among Latin American countries, Colombia, one of the region’s rising star economies, actually saw inflows of $21m in May – while Mexico saw outflows of $221m.
“The outflows have been particularly intense for Brazil,” said Bertrand Delgado, EM strategist at HSBC. “And it could get worse because the current policy framework has made the country more susceptible to the global economic slowdown and heightened European risk.”
The data dovetail with findings from the latest Bank of America /Merrill Lynch survey of fund managers, which the bank said suggested that “investors appear to have thrown in the towel on Brazil”.
As the chart below shows, 14 per cent of fund managers surveyed said they were underweight in Brazil in May. This marks a sharp turnaround in sentiment compared to April, when 20 per cent said they were overweight in Brazil. It is also the first time investors have turned negative on Brazil since February last year.
In normal times, moves by Brazil’s central bank to aggressively cut its policy interest rate (at a historical low of 8.5 per cent a year after Wednesday’s cut) should provide support for the stock market as it spurs consumption and low bond yields make equities look more attractive in terms of valuation.
Yet Brazil’s rate cuts appeared to have the opposite effect, with investors interpreting the cuts as panic moves against the country’s stagnating economy. Things haven’t been helped by the Bovespa’s underperformance. The index has lost 21 per cent of its value since mid-March, compared to the MSCI Emerging Markets Index, which fell 15 per cent during the period.
As Delgado at HSBC put it, Brazil has arrived at a ”conjuncture point”. While the investment thesis for the country remains a robust long term bet, its short term prospects are less clear.
“The economy is facing three headwinds: a deterioration in commodity outlook; a potential worse than anticipated slowdown in China; and the eurozone issues,” he said. “Brazil’s growth model has hit a point where it needs to undertake reform to boost investment and productivity.”
William Landers, who manages BlackRock’s $749.5m Latin America fund, is among those who have been trimming back holdings in Brazil in recent weeks.
While Brazilian assets still make up some 66 per cent of his portfolio’s holdings, the fund has gone from being some 600 basis points overweight on Brazil to just 400bp overweight.
Some of the money has been used to increase holdings in Mexico (where strong fundamentals and export-led growth are attracting renewed interest from investors) as well as Chile and Peru. But Landers said the lack of liquid investable stocks in those countries remained an issue for prospective investors.
“For mid to large LatAm equity investors, Brazil remains a must-own market because it is the most liquid market,” he told beyondbrics.
But like Delgado, Landers believes the Brazil story remains intact.
“Sure, we would like the government to be less interventionist,” he said. “But Brazil today is no longer the Brazil of the 1990s. Many of the problems that we once associated with the country – high debt, high inflation, weak currency – are no longer applicable. The country has a young and growing middle class and that will translate into economic activities and business opportunities.”
Plus, he added, the best time to buy is when there is blood on the street. Within Brazil, Landers said he had been taking money out of financials and putting it into export-oriented companies, which he thinks should receive a boost from the weakening real.
As in any relationships, things are bound to hit rough patches. So while some investors might be taking a break from Brazil for now, the love affair is far from over.
Mexico-Brazil: the tide is changing, beyondbrics
Mexico steps out of Brazil’s shadow, FT
Still everything to play for in face-off with Brazil, FT