Foreign flows returned to the Brazilian stock market in the second quarter as U.S. bond yields eased and progress in vaccine rollout in the South American nation paved the way for a faster economic recovery.
From April through June, more than 44 billion reais from international investors flocked to Brazil's B3 S.A. - Brasil Bolsa Balcão stock market. Non-Brazilian investors had shied away from the market in early 2021, when rising interest rates in the United States and the second wave of COVID-19 spooked investors, generating net outflows in March.
Brazil is not yet out of the woods, but foreigners have once again placed their bets on Brazilian companies. A steady pipeline of IPOs and follow-on offerings in the market have continued to garner international interest and provided investment opportunities.
"The Brazilian stock exchange went back to its historic high," José Falcão de Castro, an equity analyst with Nu Pagamentos SA's Easynvest, said in an interview. In early June, the leading stock index Bovespa hit an all-time high, breaking through the 130,000-point threshold.
"The global scenario is still one of high liquidity in the short term, with central banks signaling the upholding of an expansionary monetary policy," Falcão de Castro said. "This bodes well for riskier assets and capital flows to emerging markets such as Brazil."
According to analysts, progress in vaccination campaigns has been another key driver for inflows to resume.
"[Foreign investments] have a very strong correlation with how the COVID outbreak evolves," Luciano Rostagno, chief strategist in Brazil with Japanese investment bank Mizuho Bank, said in an interview. "The outlook for the next few quarters is positive because vaccination is making progress and the economy will gain momentum."
Brazil's projected economic growth has been revised upward repeatedly in 2021. The latest market survey by Banco Central do Brasil suggests a 5.3% expansion this year, up from 3.2% forecast at the end of the first quarter.
According to a report by Bank of America, vaccinations and the reopening of the economy are "the biggest trigger" for equity prices in Brazil. After a slow start, the country has accelerated its inoculations to the point that nearly 15% of the population have full protection and more than 40% have at least one dose, according to Our World in Data.
In another positive development for investors, credit risk eased in Brazil and elsewhere in Latin America during the second quarter. Spreads on Brazilian credit default swaps, a key gauge of risk, fell to 164.19 points as of June 30 from 221.42 points at the end of March.
After a dip in Brazilian stocks in the first three months of the year, equities outperformed emerging market peers by the end of the second quarter. Brazilian equities returned 7.2% year-to-date, while emerging market peers gained 4.8%.
Still, inflows to the domestic stock market are not as strong as seen at the end of 2020, and political risks loom. As the November 2022 presidential elections begin to come into investors' full view, experts forecast that inflows will remain positive, but muted, for the remainder of the year.
President Jair Bolsonaro's clashes with the opposition, along with an official congressional investigation into the government's handling of the COVID-19 pandemic, have laid out a "tense political environment," Rostagno said. Recurring negative headlines, he argued, stymies stronger investment conviction from non-Brazilians in the market.
'Biggest tail risk'
"Next year's elections are highly uncertain," Mizuho's Rostagno said. "The medium-term outlook is not so good for Brazilian assets, and more volatility is expected going forward."
"Foreign investors will likely be more cautious [since] Brazil is still in a weak fiscal position," he said.
Last year, Brazil was among the Latin American economies that contracted the least. GDP fell less than 5% in 2020, compared to peers such as Argentina and Peru that reported double-digit GDP falls. But it came at the expense of onerous fiscal support, which has also resulted in greater debt levels.
"Problems caused by the pandemic, added to an unstable and polarized political scenario, may bring volatility and even a reversal in flows at some point," Nubank's Falcão de Castro said. "But I maintain my optimistic short-term view for the Brazilian stock market."
As of July 21, US$1 was equivalent to 5.24 Brazilian reais.