(Bloomberg) -- Foreign investors keep pulling money out of Brazilian stocks as mounting fiscal risks and rising interest rates dim the outlook for local equities.
Foreigners yanked about 3 billion reais ($495 million) from the local stock market in the first three sessions of the year, according to data from the exchange. They had already pulled $5.3 billion from Brazilian equities last year, the most since the 2020 pandemic.
Brazil assets lagged all major peers in 2024, with the real weakening 21% against the US dollar and the benchmark Ibovespa stock index down more than 10% — a rout that erased more than $290 billion in market value.
Concerns around the nation’s swelling budget deficit, which accelerated in November as a highly awaited fiscal package disappointed, have taken a toll on inflation expectations. That forced the central bank to hike rates. Analysts now see borrowing costs climbing to 15% by year-end, further diminishing the appeal of stocks even as valuations sink to the lowest relative to the emerging-market benchmark in almost 20 years.
“Brazil’s fiscal uncertainties could harm returns for stocks this year and the market is already pricing this in,” said Isabel Lemos, an equity fund manager at Fator Administração, a Sao Paulo-based asset manager.
Morgan Stanley, JPMorgan and HSBC have all recently downgraded Brazilian stocks amid the dim outlook. In a note last week, HSBC cited Brazil’s “toxic” environment with high rates, a weak currency and slower growth, naming the nation a “classic” value trap.
Brazil’s worsening prospects also come at a challenging time for emerging markets. Questions about the Federal Reserve’s rate cuts, US President-elect Donald Trump’s incoming administration and its policies, and worries about China’s economy are all weighing on the asset class.
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