Why are foreigners leaving Brazil and what is the impact on the dollar?

By the first day of April, foreign investors had already withdrawn more than R$22 billion from our Stock Exchange. I receive a lot of questions in the WhatsApp community (click here to join) about this movement, since when looking at our companies and the market as a whole it seems that the Brazilian stock market is very cheap.

Furthermore, when we look at indicators such as the Gross Domestic Product (GDP) and inflation, everything seems to be under control, in addition to Brazil being one of the markets that pays more interest to investors, something that foreigners have always liked to have here, since We do not have as great an institutional risk as other emerging markets – Turkey for example.

One of the main reasons for the outflow of foreign capital is the risk of a global recession. When in doubt as to whether the markets could enter a recession or not, outside investors seem to have little doubt that the safest thing is to keep their investments close by, especially in dollars. Added to this is the expectation that his money can yield much more there than here, whether in interest or in shares.

Why foreign investors leave the country

In recent weeks we have seen three assets rise sharply: American shares that renewed their historic high, gold and the dollar against practically all currencies in the world.

When I talk about the dollar, we need to keep in mind that the North American currency can only rise against the real, due to some local factor, or appreciate against all the world’s currencies on average, which is what has been happening. Analyzing this movement we have the first sign that foreign money, the large flow of international investment funds, is returning to the United States.

Put yourself in the shoes of the American investor. Shares there continue to rise and, despite high expectations, the results of more than 80% of companies in this last quarter exceeded what the market expected. In other words, there is still room for appreciation or, at least, to continue delivering good returns to shareholders – more than emerging markets.

• New rules for funds in Brazil attract foreign investors; see details

When in doubt whether or not it is worth having shares abroad (which may not be unanimous), the Federal Reserve (Fed, the American central bank) will keep interest rates high for at least until June and there is already discussion about whether there will be three or just two cuts in rates, while at the beginning of the year there was talk of four or five interest rate reductions. And higher rates for longer means that having the dollar pays the investor more.

Brazil, in turn, has already started to reduce interest rates and the country could end 2024 with 9% per year, a far cry from the 13% per year a few months ago, a scenario that still proved charming to keep foreign investors in the Brazilian market.

And for the more pessimistic investor, who believes we are close to a global recession, gold has reached new historic highs. To buy the metal, the base currency is the dollar, so the foreigner takes the money home and buys gold contracts for protection.

Because of this, we see American stocks, the dollar and gold rising nonstop while foreign investors take money from around the world. Just to reinforce, to withdraw resources from the Brazilian market he needs to sell the assets he has and exchange the real for the American currency. Therefore, in recent weeks the dollar has risen and is already passing R$5.05 as I write this article.

Does the situation continue?

Will this movement continue? Probably yes, since foreigners’ positions in Brazil are still close to 7.5% – against an average of 5.5% when we look at the “emerging” portfolio.

The fact is that when the foreigner leaves, it takes a while for him to come back. Likewise, when he comes, he studies for a longer period of time before reassessing his positions.

In the end, the investor seeks to understand where he can make more money with the same risk and more quickly, or at least where he can have the same return with less risk. The answer seems to be clear for the foreign investor.