Foreign investment in the stock market drops 77% in July with unstable scenario in Brazil – 8/25/2021 – Market

The volume invested by foreigners in the Brazilian stock market, investment funds and government bonds totaled US$ 1.2 billion in July, a reduction of 77% compared to the previous month. The data were released by BC (Central Bank) this Wednesday (25).

The month was marked by volatility on the B3 (Brazilian Stock Exchange), with the threat of the Delta variant of the coronavirus, water crisis and rising inflation.

During the period, foreign investors preferred safer papers and withdrew US$ 728 million of shares and investment funds. The outflow was offset by a net inflow of US$ 1.9 billion in government bonds.

“Despite being lower, portfolio investment has maintained the trajectory of net inflows. It is important to remember that in the previous 12 months there was a very strong outflow caused mainly by the pandemic in March, April and May”, pondered the head of the statistics department from BC, Fernando Rocha.

In August, the scenario deteriorated further with fiscal noise. Doubts regarding the funding of the government’s new social program, Auxílio Brasil, and the payment of precatório (government debts in court) caused high volatility in the market.

Partial data from BC until last Friday (20) show that foreign investors invested US$ 444 million in the domestic market.

Compared to July of last year, however, there was growth of 33%, when US$ 885.4 million were invested. In 12 months, there was a net inflow of US$ 44.9 billion.

“These US$ 44.9 billion are intended to replenish foreign exposure in the domestic market, but it is already surpassing last year’s drop,” said Rocha.

In May and June, investments of this type were significant, with US$5.9 billion and US$5.1 billion, respectively.

In March of last year, when the virus reached the country, foreigners withdrew US$ 22 billion from the Brazilian bond market, which had registered negative results until May.

This type of investment usually declines in turbulent months because it is very sensitive to momentary crises and noise.

After registering the lowest result in five years in June (US$ 174 million), direct investments showed recovery and totaled US$ 6.1 billion in July. For the month, the number was the highest since 2014.

In 12 months, the modality totaled US$ 47.5 billion, equivalent to 3.04% of GDP (Gross Domestic Product).

Unlike investments in stocks and government bonds, direct investments in the country are made by companies that establish a medium and long-term relationship with the country and are less volatile as they involve longer-lasting decisions.

​According to preliminary data for August, US$ 4.17 billion were invested in the period. The BC estimates that the month will end with an inflow of US$ 5.8 billion.

According to Rocha, most of the direct investment in July was made through equity participation, when the foreign parent company injects resources in exchange for a slice of the Brazilian company. In the modality, the remuneration for the investing company is made from the distribution of profits.

Intercompany loans, when the parent company grants credit to the Brazilian company, fell in the month. In this case, the return of the foreign company is made with payment of fixed installments within a specified period, with interest.

“The choice of the modality depends on the exposure that the investor has in the company’s balance sheet. It is not possible to say that it is a trend, but the participation in the capital has been increasing and the intercompany loan has fallen in relation to previous periods”, said the technician from BC.

The entry of these applications in the country was impacted by the pandemic. With the crisis, these investments plummeted in 2020. Compared to the previous year, the volume of applications fell by half. In all, US$ 34.1 billion were invested in the country in the period, against US$ 69.1 billion in the previous year. The number was the lowest since 2009, when US$ 31.4 billion were invested.

According to the BC, in July the external accounts had a deficit of US$ 1.6 billion, compared to a deficit of US$ 600 million in the same period in 2020. In the 12 months, the result was negative by US$ 20.3 billion.​

The BC’s projection for August is a surplus of US$ 1.1 billion in current transactions.

The trade balance registered a surplus of US$ 6.3 billion in July.

Exports totaled US$ 25.8 billion in the month, an increase of 31.9% over the same period last year. Imports totaled US$ 19.5 billion, up 49.9% on the same basis of comparison.