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This is the current position of the Brazilian stock exchange, an enterprise that was nearly irrelevant five years ago:
It is a waste of time to attempt to predict the stock market for the next six months, or a year from now, or in 2012. This would be the same as foretelling the future. Since the beginning of the international crisis, most recent events and the incredible history of failing and rising records in the Brazilian stock market, have made clear that the stock exchange - as well as its country - has changed rank. There is no solid stock market in emerging countries. And there is no rich country without a solid stock exchange. The latest BM&F Bovespa results indicate that Brazil is starting to move on from the first to the second group. It also indicates that, despite oscillations- and they will most certainly happen - the Brazilian stock market seems destined to become better over the years. "Like any other global stock exchange, the Brazilian one will have its ups and downs over the years", says Mark Mobius, one of Bovepa's main foreign investors, manager of emerging markets for American company Franklin Templeton. "In the long run, it offers one of the best profit potentials in the world." Stock markets are based on economic prospects and corporate results - today, on the eve of the first anniversary of Lehman Brothers' bankruptcy, which originated the most acute global financial crisis episode - few countries are in such a favorable position as Brazil in the international arena. Even though we are behind China and India, the country is well positioned in terms of GDP prospects - a minor retraction is anticipated this year as well as a 3.6% increase in 2010. Recently, Brazil was called "a remarkable emerging economy" by Mohamed El-Erian, president of North American company Pimco, managing 840 billion dollars in investments. In a recent article published by British newspaper Financial Times, he said that the Brazilian, Chinese and Indian markets "are emerging from the global financial crisis with the ability to stand up to mid-term growth in significantly better conditions than industrial countries". After decades of exceedingly high interest rates, Brazil has learned to live with one digit inflation rates, which provides vigor to the economy and smoothes the progress of companies' finances.
Brazilian stock exchange trades up
The stock market consolidates and earns stature in the international financial scenario
The Brazilian stock exchange carried out the second largest worldwide public offering this year (in billion dollars)
Why it is important: IPOs represent a financing alternative for companies.
By the beginning of August 2009, Brazilian companies had raised almost 20 billion reais through stock market
From January up to the beginning of August, Bovespa achieved the highest valuation among main global stock exchange (percentage of increase in dollars) (1)
Why it is important: The stock exchange is consolidated as an appealing investment option for Brazilian investors - an alternative that has become even more important with profitability decrease in fixed income
Results of foreign investments in Brazilian stock exchange are encouraging (2) (Monthly balance in reais)
Why it is important: It has bolstered investors' confidence in the country and sped up the development of the Brazilian stock market with incoming resources
Brazilian stock exchange is the fourth largest in the world in market value (4) (in billion dollars)
Why it is important: It emphasizes Brazil's position as the great finance leading axis in Latin America and one of the main emerging countries - and promotes the country's new economic level
(1) Up to 8/11 (2) Balance of investments after withdrawal. (3) Up to 8/10 (4) Stock market value as publicly held companies, as opposed to market value of registered companies. Source: Bovespa, Dealogic and Thomson Reuters
Facts like these justified stock exchange peak of this year, 87% in dollars and 51% in reais from January to August - one of the best worldwide performances among major stock markets. These numbers should be analyzed in relation to the 2008 context - when Bovespa Index traded down 41%, one of the most unsound results in the world and the worst registered by Brazilian stock exchange since 1990. It is also possible that stocks have just risen excessively and there should be some adjustment in the next future. That does not matter. The fact is that once the crisis was past Bovespa rapidly stood up well and is among the five stock exchanges that recouped accumulated losses after Lehman Brothers' bankruptcy, a milestone in the current global crisis. That is what happened to the Icelandic market, with over 90% losses in value in 2008 and, currently, little more than 20 listed companies. However, in modern financial systems, stock exchanges confront problems but are able to rise again.
Interest in Brazil
A bull market is not just an advantage for investors. It is also eagerly anticipated by dozens of companies that plan to raise capital through the stock offer. The best strategy for a company planning to go public is to get internally organized, bide time, and get the best prices. We are experiencing one of these moments now. Brazilian companies have never increased in value so much. An indicator establishing the relationship between major companies' stock prices and estimated profit for the next 12 months - called price-profit indicator and quite used by market analysts in the assessment of the stock exchange - has reached a historical record this year. Nevertheless, according to these criteria, the Brazilian stock exchange is cheaper than similar ones in main emerging countries, such as China and India. This differentiation might indicate that there is still room for new peaks in the Brazilian stock exchange. Between March and August, eight companies issued stock offers and obtained almost 20 billion reais at Bovespa - among them are the real estate venture MRV and the cosmetics manufacturer Natura. By August 14, two other companies had informed the Securities and Exchange Commission on their intent to go public - in addition to Santander Bank and Tivit, a technology services company controlled by Grupo Votorantim, which are also in the waiting list. Other stock offer plans are being concocted by investment banks.
Santander's operation, which might take place in the next few months, is symbolical. One of the largest financial companies in the world, the Spanish bank controlled by the Botin family, intends to sell 15% of the Brazilian subsidiary shares. It is estimated that the bank will amass approximately 4 to 7 billion reais - which would be one of the largest public bids ever made in the local market, and in the worst-case scenario, the third worldwide largest operation this year. Why Brazil? First of all, because Santander's local franchise already corresponds to 18% of its global profits, the largest participation outside Spain. Moreover, international investors, potential buyers of the bank shares are not seeking Europe, but emerging countries instead. Foreigners have never invested so much money in Bovespa. In May, the balance of foreign investments has reached historical record of 6.1 billion reais.
For Santander and other companies that might go for public offers, Brazilian investors are expected to be in larger numbers in the bids - not only individuals, but also heavy-weight companies, such as pension funds. "They are just waking up to a new market era", says Alan Gandelman, president of the Brazilian subsidiary of the Canadian stockbrokers company ICAP, one of the largest in the world.
Market interpretation
The current amazing rise of the stock market is explained by an improvement in foreign the scenario and Brazilian economy. See the main issues that have affected the market and what to expect from now on.
In developed countries - as well as in many economically stable emerging countries - the exchange market represents a sizeable portion of family savings. In the U.S.A., United Kingdom and Korea, half of the investment funds assets are invested in the stock exchanged. Here, the percentage is around 10%. "This will change. In an environment with civilized interest rates, the stock exchange has to be in the perspective of almost all investors planning to build long-term finance reserves", states Maílson Hykavei, former director of Real's private banking and partner of FinPlan, a financial consultancy. Only those who do not want to or cannot afford to take risks - for example, those who will need the money to buy a property in a short period of time - might rightfully ignore the stock market.
Local investor
In the case of pension funds, migrating to the stock exchange seems almost inevitable. Most of these funds need to yield actual returns of approximately 6% a year in order to cover retirement plans. "Few fixed-income investments yield as much. The only solution for these organizations is to increase their share in the stock market", says Fernando Lovisotto, partner of Risk Office, a consultancy providing services to pension funds.
Bank of America's broker Merrill Lynch estimates that stock market investments made by Brazilian companies will more than double until 2013, adding up to 280 billion dollars. "This flow of resources might fuel the stock exchange valuation", says Pedro Martins, chief strategist for Latin America. According to dozens of bankers, brokers, financial consultancies, and funds management organizations, foreign market risks - especially those originating from the USA - represent the greatest threats to Bovespa´s rise, as they have been the biggest weakness of Brazilian market. If the largest economy in the world fails, there is no way the rest of the world will sleep tight. "What needs to become more obvious is whether or not the American economy has actually hit rock bottom and is ready to start its recovery, even if is slow", says Roberto Padovani, investment strategist for the WestLB bank. According to the logic of financial analysts, this will take place when crucial events in the U.S.A. - real estate sales, unemployment, and industrial production - stop getting worse. Real estate and employment indexes have already shown a slight improvement. For the first time since October, in the industrial production has increased in the country.
A considerable number of economists - including Ben Bernanke, president of the Federal Reserve, the American central bank - believe that the U.S.A. has already started to improve. If such is the case, is it possible to say that Bovespa will live happily ever after? No, no, and no. Is it going to be a warranty against stock exchange losses? Absolutely. In the future, companies might be required to postpone plans of going public or launching shares during eventual turbulence? Without a shadow of doubt. It is part of the nature of the stock exchange to undergo bearish or bullish markets even under favorable conditions. Nonetheless, the encouraging scenario projected for the country cannot be forgotten by investors and entrepreneurs. After decades of consecutive chicken-heartedly attempts, Brazilian economy may be finally starting a virtuosic cycle. Capitalism is strengthening every day - and the stock exchange is an essential component in this process.
High risks for the Brazilian stock exchange come from abroad. If the U.S.A. economy does not improve, the global stock market will suffer the consequences
Chrysler's plant in Illinois: economists from all over the world follow industrial production indexes in the U.S.A. to feel the pulse of the recovery
Above average
Small and mid caps companies recommended in 2008 performed better than Bovespa Index
In the last edition of EXAME'S GUIA PESSOAL DE INVESTIMENTO (PERSONAL INVESTMENT GUIDE), 30 finance experts pointed out 20 small and mid caps companies as good investment alternatives - less negotiable and those with the lowest market value. In the wave of the crisis, recommended stocks were depreciated by 5% over the last 12 months, closing in July - a better performance than Bovespa's Small Caps Index, which lost 16%. The stars for the same period were the food company M. Dias Branco and the textile company Hering - which traded up 57% and 53%, respectively. The holder of Adria's trademark, M. Dias sells low-value products such as pasta and biscuits, the consumption of which was less affected by the crisis. In the case of Hering, analysts attribute the high yield to the management's strategy of increasing the number of stores. The worst results were Sadia, which traded down by 55%. The company was seriously affected by billion-dollar losses in foreign exchange transactions. It is worth remarking that all magazine journalists followed the policy that forbids investments in stock, IPOs, investment clubs and sector stock funds.
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