Foreign investors cooler on Brazil

The ardour of foreign equity investors for Brazil has cooled this year as attention has turned to other emerging markets.

Inflows into Russia, India, China, Taiwan and South Korea have all eclipsed fresh investment into the South American country, according to data from EPFR, a research firm that tracks fund flows.

Analysts say a rush of funds to Brazil last year as it emerged almost unscathed from the global financial crisis pushed share prices to less attractive levels. Added to that is nervousness over the outcome of Brazil’s presidential election in October.

Overall, equity inflows into Brazil have fallen to $1.8bn in the year to date compared with $13.5bn in 2009, according to EPFR. China, in comparison, has attracted $6.5bn, compared with $14.6bn in 2009.

“Investors are still in love with the Brazil story but it was a very strong performer last year,” said Paul Biszko, senior emerging markets strategist at RBC Capital Markets. He said Brazil tended to act as a proxy for the emerging market universe with equity fund flows to the country see-sawing wildly this year.

The Bovespa, the Brazilian stock market benchmark, has fallen 4 per cent this year after a 70 per cent surge in 2009. Analysts said valuations as a result had become more attractive.

Brazilian stocks are now valued on an average at 11.2 times the consensus of forecast earnings this year and 9.4 times 2011 profits. The average multiple for the emerging markets universe is 11.9 times 2010 earnings and 9.9 times 2011 earnings.

Some analysts think the result could see appetite return after the national elections.

Sam Dean, co-head of Equity Capital Markets at Barclays Capital, said: “Institutional investors remain very positive about the fundamental outlook for Brazil, and [see] further upside in the stock market, especially post elections.”

Demand for Brazilian debt has been growing. Bond inflows are up sharply, from $1.8bn in 2009 to $2.8bn in 2010, EPFR said.

Edwin Gutierrez, debt portfolio manager at Aberdeen Asset Management in London, said: “Brazil offers the most compelling real yields in the world.”

Mr Biszko added: “This is an investment grade country growing at 7 per cent plus, offering yields of 10 to 12 per cent. China and India offer less than 5 per cent.”

Some attention has switched to the smaller emerging markets such as Indonesia and Turkey. Indonesia has seen almost $1bn of inflows into its relatively small equity market, pushing it to all-time highs in recent weeks. Its bond market has seen even more interest, attracting $2.1bn so far this year.