The Brazilian Stock Market

Through the Crisis

The following description and analysis is based in part upon a
comparative analysis of six equity indices throughout the same time
period. The indices chosen were the Dow Jones Industrial Average
(“DJI”), and the Standard and Poors 500 (“S&P 500”) of the USA,
the Financial Times and London Stock Exchange 100 Index (“FTSE
100”) of the United Kingdom, The Cotation Assistee en Continu 40
(“CAC 40”) of France, China`s Hang Seng Index (“HSI”), and
Brazil`s Indice da Bolsa de Valores de Sao Paulo (“Ibovespa”).
The period under review is represented in Figure 1 below, from June
30th 2008 through November 4th 2009, based upon daily
fluctuations. In terms of methodology, June 30th 2008 is 100% for
all of the indices, and the graph tracks the indices relationship to the
June 30th index. We divide the time into three periods, Panic;
Unison and Differentiation:
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Stock Markets Performance, J une 2008 to November 2009

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^DJ I

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S&P500
• Panic
The time between June 30th, and the fall of Lehman Brothers was not a time of
universal panic, as four (DJI, S&P, CAC 40 & FTSE) of the six indices were
either at or around their June 30th level on September 15th 2008 when it
became clear that government support would not be adequate to induce
Barclays Bank to pick up the pieces and “buy” the ailing institution. Thus
Lehman filed for bankruptcy protection. At this time, the Ibovespa index was
a full 20% off its June 30th high, and the HSI was 15% off, showing that
investors were already concerned about emerging markets, and looking for
safe havens.
However, the period thereafter proved to be a disaster, as the characteristics of
a panic market took over. These characteristics entail a broad selling
pattern; no stability of value to which investors may cling; no idea as to
where the market bottom might be; exaggerated increases and decreases in
value as occasional pieces of information or news affect the appetites of
investors; no real understanding of how individual stocks, or indeed stock
markets may be affected by a global crisis; a desire to retreat into safe
havens.
• During the period between June 30th 2008, and year end, the US
Dollar strengthened against the Brazilian Real by 46% as investors
withdrew their funds from Brazil. On the chart above, the miserable
pattern is exaggeratedly worse for the two emerging markets, Brazil
and the HIS, which both hit lows during the period on the same day,
October 27th, 2008. The Ibovespa reached 45% of its June 30th
level, while the HSI reached 50%. Of the indices for the developed
economies, the S&P 500 fell the farthest reaching 58% of its June
30th value on November 20th. On the same day the DJI registered
its low of 67%, and a day later the FTSE and the CAC 40 registered
their lows of 67% and 65% respectively.
• Early in 2009 a change was under weigh. Investors realized that the
emerging markets had been punished too hard, and so, between
January and February the Ibovespa and the HSI rose to levels that
were above the lower levels of the developed markets. This ushered
in the second phase of Unison.
• Unison
• This phase lasted for a relatively short period of time, from mid-
March, 2008 to mid-May and was characterized by all of the
markets maintaining a very thin spread between them. It was as if
investors had decided that they were initially all worth about 65% -
70% of their June 30th value, but trading up, during Unison to 72% -
78%. Indeed, on April 9th, the spread between the highest, the DJI,
at 71%, and the lowest, the S&P 500 at 67% was just a fraction over
4%. Differences had been as high as 29% in October 2008.
• The significance of this phase is in understanding the changing
mentality of the investor. He was beginning to be convinced that the
safe haven was probably no safer than the emerging market, and
thus he had decided to risk a portion of capital on a story that told of
growth and recovery in the relative short term.
• Differentiation
• By the end of May, 2008 the emerging markets were clearly
demonstrating value, as the HSI crossed 85% on June 1st, and the
Ibovespa reached 83%. The four developed markets were in a
range of 73% to 80%. The trend only grew more marked throughout
the summer of 2009, with the HSI reaching the 90% level in July,
while it took the Ibovespa until September. The FTSE made 90%
about a week after the Ibovespa, but the DJI, S&P 500 and the CAC
40 have yet to attain this level.
• However, October started out as the month of Brazil, with the
Ibovespa being the first of these indices to pass its June 30th ’08
level less than two weeks after Brazil`s hosting of the 2016 Olympic
games was announced. The HSI passed the 100% level a few days
after the Ibovespa, but the S&P remains at October month-end,with
the wooden spoon at 81%, The CAC 40 at 83%, and the DJI at
86.4%. The FTSE has stalled at 91%.
The investor has been dedicating a larger percentage of his resources to the emerging
markets, where, at least in Brazil`s case, the story has been almost relentlessly
positive. Sporting events promising enormous projects of construction and urban
renewal, with enormous price tags, and new and significant resources of petroleum,
albeit at depths beneath the sea that have never yet been developed, lead the way
for Brazil with the promise of a continuing bright future.
On October 22nd, however the government took the measure of placing a 2% tax on
investment capital entering the country. This act has coincided with a general
downturn in other stock markets, with the notable exception of the HSI. The Ibovespa
has both lost ground and entered into a period of pronounced, but limited volatility, as
a result. Nonetheless, the weakness of the Brazilian stock market, at the time of the
Lehman Brothers bankruptcy was its classification as a market within an emerging
market, with all of the weaknesses that may imply in terms of size, instability, ability to
be manipulated etc. However, the emerging markets have proven to be far more
resilient than expected and have returned to growth (China is expected to grow nearly
9% in 2009, Brazil will grow 0.5% this year, and is projecting 5.0% for next year.)
much faster than expected, and much faster than the developed markets.
• Foreign Capital
• It is important to understand the role of foreign capital in the
Brazilian stock market for a number of reasons. First, it has been
the prime motivating force in both the drastic fall in values, and then
the dramatic rise. Brazil has fallen farther, and risen higher than any
other of the stock markets we have been analyzing.
• Figure 2 below demonstrates the correlation between the change in
value of the Ibovespa, and the influence of foreign capital. October,
2008 through February 2009, and June 2009 reflect disinvestment.
The other months were positive.
• The table shows the importance of the foreigner as a market mover,
and as the marginal investor that is first to leave, but quick in
returning when market risk and fundamentals have been evaluated.
However, it also shows that in September and October 2009,
Brazilian investors have returned and are purchasing as much as
foreigners due largely to an increasing participation by financial
institutions and individuals.
Figure 2
Linear Correlation/ Monthly % Growth
2008 2009
October 0.53 0.00%
September 0.32 5.80%
August 0.62 8.90%
July 0.88 3.10%
June 0.60 6.40%
May 0.83 -3.30%
April 0.65 12.50%
March 0.84 12.70%
February 0.80 12.90%
January 0.68 -2.80%
December 0.21 4.70%
November 0.84 2.60%
October 0.69 -6.80%
Entire Period 0.55 -1.80%
• Figure 3 demonstrates the net value per month invested in the Bovespa by
the four categories, of i) individuals, both as individuals and members of
investment clubs; ii) institutional investors; iii) foreigners and iv) financial
institutions that comprise roughly 95% of the Brazilian sock market. The
graph further demonstrates the importance of foreign investors, as
institutional investors have only once since November ’08, (January ’09)
bought more shares than they have sold, with the cumulative negative net
value being R$ 14.7 billion. This does not mean, however, and particularly in
a market of rising values, that institutional investor’s exposure to the market
is declining. In terms of individuals, the graph shows five months of positive
investment, and eight months of negative investment, which adds up to a
negative net investment over the period of R$ 7.0 billion. Financial
institutions (never ones to be in the vanguard of a trend, but also, never
ones to miss out on the benefits) participation in the market has risen in
September/ October 2009 from an essentially neutral i.e. value of purchases
= value of sales, range of 5% to 6% participation in the market to the 8% to
10% range, or a net positive investment in September alone of R$ 2.2
billion. Foreigners, however, have led the value rise in Brazil, with a net
positive investment over the period of R$ 12.9 billion, or positive numbers in
eight of the 13 months under consideration.
 Foreigners
Monthly Net Investment (Oct '08 - Oct '09)
Individuals
Institutional
$8.000.000
Fin Insts
$6.000.000
$4.000.000
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• The 2% Tax on Foreign Investment
• On October 22nd the Brazilian Government announced a 2% tax on
foreign capital entering Brazil to participate in the stock or fixed
income markets. As of the end of October, the Brazilian stock
market had fallen 8.5% from its high on October 19th. It would not
be fair to attribute all of this fall to the tax, but compared to the stock
markets of other countries the Brazilian decline has been
exaggerated. There are some serious issues of market liquidity,
and speculation which will be dealt with in a longer article here, but
suffice it to say that this is a measure that has been taken by the
Brazilian Government where many of the attendant implications are
far from clear.
• However, Figure 4 demonstrates a clear and swift reaction to the
government measure on the part of foreigners who were net positive
investors in the stock market up to October 19th of more than R$
5.0 billion. From that date to the end of October foreigners became
net negative investors to the tune of R$ 2.6 billion.
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