Local Investors Discover Brazilian Stocks

The COVID-19 pandemic has been devastating for Brazil, but heavy government spending and monetary policy easing have helped bring some stability to the economy. Claus Born, senior vice president and institutional product specialist, Franklin Templeton Emerging Markets Equity, shares some thoughts as to why local investors have been supporting its market in recent days, too.

Brazil has seen many negative headlines in the last few months. The country is among the hardest hit by the coronavirus pandemic, just behind the United States in the number of reported cases.

But there is some positive news from an investment standpoint. From its lows in late March, the Brazilian stock market has recovered more than 55% in local currency terms and more than 45% in US dollar terms.1

What Explains the Current Interest in Equities?

In the past, Brazil offered high interest rates to local savers. Most of them just bought government bonds to receive solid returns. Many investors felt there was no need to bother with what they perceived to be more risky investments, such as equities.

However, over the past decade, interest rates have dropped quite dramatically. Interest rates are now at historically low levels, with the central bank’s benchmark short-term rate, the selic, currently around 2%, compared with more than 14% only four years ago. Brazilian investors used to healthy fixed income yields thus needed to look for alternative ways of generating returns.

In this low-yield environment, many of them have started turning to the equity market. The number of trading accounts has been increasing exponentially. Brazil’s stock exchange has seen a surge from around 600,000 accounts in 2008-2017 to nearly three million accounts today.2 (See chart below)

Is this the peak of the trend? In our view, probably not. With a population of more than 210 million inhabitants, still less than 1.5% of Brazilians are currently engaged in the stock market. However, new investors are discovering the potential opportunities. Not only are more women investing in Brazil’s market, up from 22% in 2018 to 25% today, but it is attracting growing interest among the younger generations of both genders.3 More than 70% of investors are aged 46 and under, representing more than 25% of value invested in the stock market.4