A Brazilian stock exchange It’s cheap, with a discount of at least 25%, but it still doesn’t catch the eye of the customer. foreign investor. Michel Frankfurt, head of stock brokerage at Scotiabank Brasil, points out that there is a lack of “interest” in the domestic market – and the expert knows very well what he is talking about.
Scotiabank is a Canadian bank specialized in credit for large companies that has been expanding its presence in Brazil since last year. At the beginning of the year, for example, it was one of the financial institutions hired to advise a Energisa share offering (ENGI11). Furthermore, together with Citigroup and UBS Investment Bank, it led the issuance of dollar bonds on the international market, carried out by Tesouro Direto.
“Today, we serve many foreign customers. We speak to major American, Canadian and some European houses,” says Frankfurt. “We recently hired a local sales. In other words, a commercial that will help us develop and open local houses, but our big product today is for foreign investors”, says the expert.
According to Frankfurt, among emerging countries, the story that sounds most attractive to the “gringo” is that of Mexico. The country is experiencing a “boom” in capital flow due to the strong commercial partnership with the United States, intensified after the covid-19 pandemic.
This is because, during the health crisis, production chains were broken, especially those linked to China. The episode caused global companies to choose to transfer the production centers of goods to locations closer to the markets where they will be sold, a phenomenon called “nearshoring“. And the closest gateway to the world’s largest economy, the US, is Mexico.
“Mexico is experiencing today what Brazil experienced in the 2000s,” says Frankfurt. Last year, for example, the US imported more from Mexico than from China, for the first time in 20 years. However, despite the recent projection of the Mexican market, Brazil has been losing relevance for many years.
“Brazil, in 2009, represented 14% of the MSCI emerging markets index, which is a very relevant indicator for all large passive funds. Today, we are around 5%” highlights the head. Read the full interview:
E-Investor – Is the Brazilian stock market cheap?
Michel Frankfurt – I think the multiples here in Brazil are very discounted. In the low interest market, we need to have higher multiples, and in the high interest market, we need to have lower multiples.
We are in one of the extreme moments, with very high interest rates, especially real interest. The long NTNBs (IPCA+ Treasury) are close to 6% real interest, and it is not very common, it is practically at the historical ceiling, and the multiples are very low. It is very difficult to see the stock market falling much more than it is now, unless there is a global collapse.
So the stock market tends to rise?
Therein lies the trap. It’s cheap, but it can stay very cheap for a long time because no one is looking, no one is interested. As long as we don’t have some trigger that changes foreign investors’ perception of Brazil, we will continue more or less where we are.
The foreign investor is very big, heavy, makes noise, is aggressive, sets the tone. It is this investor who will drive the market, make it move. Based on the multiple, there is room for the stock market to easily reach 150,000 or 160,000 points – but that would be if we were in a period of normality. There is room to go, but there is no interest (from foreign investors).
Did the foreign investor give up on Brazil?
From 2000 to 2010, Brazil was the hot ticket. The country had a much greater representation in the world of emerging markets (emerging markets). There was a lot of flow here. And now that ball has turned to Mexico.
Foreign investors like Mexico, they like India, and we are left behind. I always like to talk about indices: Brazil, in 2009, represented 14% of the MSCI emerging markets index, which is a very relevant indicator for all large passive funds. Today, it represents 5%.
Why have we lost so much relevance among emerging markets?
The first point is that the number of countries eligible to participate in the index was smaller in 2009 than it is today. The index was composed of fewer countries, so Brazil had more relevance. Then, other emerging markets began to develop. China, for example, has developed a lot in the last 20 years.
Unfortunately, we have not had the growth we expected in the last 20 years, like China. Our stock market grew less, we did fewer IPOs, productivity and attractiveness decreased, we fell short.
But why does Mexico, for example, attract more attention today?
Mexico was in the right place at the right time. In 2015, the relationship between China and the United States began to become a little more turbulent. What was a partnership ended up becoming a competition, what we call a “war of influence”.
This ended up damaging the global relationship which, until 2015, was about globalization. When the pandemic came, protectionism towards China worsened, because there was a risk to the (production) chain. At that time, the United States looked to Mexico as a place where it was possible to produce cheaply, with qualified people, an aligned and politically stable government.
In Mexico, 78% of the trade relationship (exports) is with the United States, there is a great dependence on each other. Therefore, all investment flows from this new reconstruction of the chain were directed to Mexico. This brought a flood of investments to the country, which we called “nearshoring”. Mexico is experiencing today what Brazil experienced in the 2000s.
