While foreigners drop Brazilian stocks, locals propel index to record
Local investors’ enthusiasm for president-elect Jair Bolsonaro has done nothing for foreigners, who continue to pull money from Brazilian stocks.
Foreign investors have pulled 6.5 billion reais (US$1.7 billion) out of domestic shares this year through Nov. 5, on pace for the worst year in data going back to 2010, according to data from exchange operator B3. Locals are piling in, fuelling a 17-per-cent rally that has pushed the benchmark index to record levels.
Investors clearly favoured Bolsonaro, who picked a wellrespected economic adviser who advocates for a smaller state and wide-ranging privatizations, over his left-wing opponent Fernando Haddad. But even after the conservative’s election last month, foreign players are concerned about the new administration’s ability and willingness to pass controversial economic measures such as the pension system overhaul seen as key to stop the deterioration of government accounts. Bolsonaro’s own back and forth on the reform, sometimes contradicting proposals from his own team, has added to the confusion.
“Investors are definitely waiting for more information on the pension reform: when, how, how much,” said Jan Dehn, a portfolio manager at Ashmore Group Plc. The pension overhaul is the most important by far, according to him, and a “failure to do this within the first six months of 2019 would be a problem.”
Much of Bolsonaro’s success hinges on his relationship with Brazil’s fragmented Congress. The former army captain will have to muster support to approve his reform agenda, which includes granting the central bank formal independence. The lower house alone has 513 members of which only 52 hail from his PSL party. The opposition Workers’ Party is the largest in the lower house. Constitutional amendments — the format chosen by President Michel Temer for his proposed pension reform — need to be approved by three-fifths of lawmakers in two rounds of voting in both houses of Congress to pass.
Foreign investors “are waiting to see how much support Bolsonaro really has to advance an agenda, given the fractured nature of power in Brazil,” said Morgan Harting, Alliance-Bernstein’s senior portfolio manager.