Ibovespa falls in May with the departure of foreigners, high interest rates and elections

The Ibovespa ended May with the biggest monthly drop in more than three years, after a sequence of drops that distanced it from the unprecedented 200 thousand mark it attempted to reach in mid-April.

The index closed the month with a drop of 7.22%, the worst performance since the decline recorded in February 2023 (-7.49%). This movement had as a backdrop the departure of foreigners from the national market, which had been supporting Brazilian shares.

The exchange's external capital balance for the month was negative at R$14.1 billion until May 27, excluding share offerings (IPOs and follow-ons), according to data from B3.

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Strategists have pointed out that the performance reflects a rotation of capital back into the technology sector in the United States and Asia. Nevertheless, Wall Street indices have renewed records in recent days.

In addition, they point out as negative weights for the market the prospect of a slower cycle of Selic cuts and uncertainties with the electoral scenario.

"The appetite for artificial intelligence continued to be the main driver of American stock markets, in contrast to the weaker performance of emerging markets, especially in countries that have less weight in this area", assesses Bruna Sene, Variable Income analyst at Rico.

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For Rodrigo Moliterno, head of Variable Income at Veedha Investimentos, the "Brazil Risk" and the exit of foreign investors is what has dictated the movement of the stock market in recent weeks.

"The stock market is really a little at the mercy of our current level of interest and fiscal scenario, which is eroding its attractiveness and expectations of improvement. Foreigners continue to rotate, leaving Brazil and returning to technology companies", he assesses.

Josias Bento, investment specialist at GT Capital, assesses that the drop in the stock market is a reflection of a risk-return relationship between the Brazilian market and global stock markets.

"Even though Brazil is one of the main emerging countries to receive foreign capital, the shorter and slower drop in interest rates and fiscal instability are making this opportunity go down the drain and the first reflection is the stock market losing capital."

In addition, the geopolitical scenario is still weighing on market sentiment, leading to greater caution among investors.

According to Sene, the market alternated between hope and frustration with the negotiations on the Middle East in recent weeks.

For her, the scenario of the last days of May was similar, but with an additional element: the conflict completed three months without a definitive resolution.

"The market is beginning to more clearly incorporate the idea that the scenario of uncertainty may persist", he assesses.

Terrorist PCC and CV
The outlook for Brazilian assets becomes even worse after the United States' decision to classify the PCC (First Command of the Capital) and Red Command as "Specially Designated Global Terrorists".

In the opinion of Cesar Queiroz, founder of Queiroz Investimentos, from now on, Brazil will carry an extremely negative label in the global market.

"This means that strategic sectors of the economy, such as the financial system, infrastructure, energy, mining and agribusiness, as well as companies that operate internationally, will have to face more severe processes", he says.

For Queiroz, the international market will start to look at the country with a greater level of caution, which should increase the pressure on banks and financial institutions operating in Brazil.

"Digital banks, fintechs, payment methods and other financial institutions begin to live with a reality of deeper audits and more intense supervision over the origin of the capital moved."

Understand the impact of the US decision to classify PCC and CV as terrorists | MARKET OPENING

Perspectives
In the Diário do Grafista report on Friday (29), analysts from Itaú BBA highlighted that the Ibovespa is on a downward trend in the short term and will have a clear path to more intense profit-taking if it stays below 173,500 points.

"To get out of this downward trend and return to a neutral scenario, the Ibovespa will have to surpass the 179,500 point region", they stated.

This week, UBS cut its recommendation on Brazilian stocks from "attractive" to "neutral", citing a change in the risk versus return profile, adding that the broader outlook for emerging markets remains constructive.

The bank's team highlighted, in a report to clients, that the repricing of valuations, monetary easing, strong inflows of foreign capital amid demand for diversification in emerging markets and a resilient macroeconomic scenario have already largely materialized in the performance of Ibovespa since the middle of last year.

UBS highlights both earnings growth and multiple expansion.

"Three converging adverse factors now alter, in our view, the risk-return balance: the increase in political uncertainty related to the elections, a shorter and less intense BC monetary easing cycle, and the acceleration of fiscal easing in the pre-election period", he pointed out.

"While fundamentals remain resilient, these dynamics should maintain a balance between risk and return leading up to the October election."

Sentiment towards the stock market worsened compared to April, according to a survey of advisors and consultants linked to XP released on Thursday (28). According to the study, fixed income continues to be clients' preferred asset class, followed by international assets.

"Political instability and elections are the main concerns, followed by fiscal risks in Brazil and geopolitical risks", revealed the survey.

*With information from Reuters

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Source: CNN