If 2020 was certainly an anomalous year for all stock exchanges, due to the coronavirus pandemic and the economic crisis that followed, 2021 was especially difficult for the Brazilian stock market.

At the end of 2020, in its year-end report, XP Investimentos wrote, in its December 2020 report (https://conteudos.xpi.com.br/brasil-2021/brasil-2021-de-volta-aos-rumos -do-growth /:

“We anticipate a fair value for Ibovespa of 130,000 points by the end of 2021, providing a potential return of 14% compared to current levels.

Despite the recent strong recovery, Brazilian equities are still far behind and the index is among the worst globally in 2020. In addition, the MSCI Brasil and Ibovespa indices are heavily concentrated in companies from cyclical sectors and the financial sector, which should benefit from a resumption of global growth and the continuation of the reopening of trade. “

Not only XP Investimentos but almost all banks and funds predicted, at the end of 2020, that the Brazilian stock exchange would perform well in 2021. One bank even predicted that the Bovespa (Ibovespa) index would reach 150 thousand points .

But that did not happen and Ibovespa closed 2021 at 104,822 points, -11.9% compared to the close of 2020 (119,017 points).

Here is the trend of the Bovespa (Ibovespa) Index from January to December 2021:

– -12% of the value expressed in reais

– -11% in euros

– -18% in dollars

If we consider that Brazilian annual inflation in 2021 reached 10%, Bovespa therefore closed with a strong loss in terms of local currency.

During 2021 the euro depreciated by 7% against the dollar, and this explains the better performance of Bovespa in European currency against the dollar

Here are the prices of the real against the dollar and the euro:

 late 2020late 2021

And here is a comparison of the performances of Bovespa, Dow Jones and FTSE Mib (Milan stock exchange) in 2021:

 end 2020end 2021Variation in US$Variation in EuroVariation in Reais
Dow Jones Index306063639819%28%28%
FTSE MIB222322734714%23%22%

Those who invested 10 thousand dollars in the Brazilian stock exchange in January 2021, at the end of the year found themselves, gross of various commissions and taxes, about US$ 8200. Bad investment. If he had invested them in an equity fund that reproduced the DJI, at the end of 2021 he would have found himself with US$ 11.900.

On the other hand, a Brazilian who had invested 10,000 reais in the USA or Italy would have found a nest egg of 12,800 and 12,200 reais respectively at the end of 2021, instead of the 8,800 reais invested in Bovespa.

I remember that the value of the basket of shares that constitutes Ibovespa is strongly concentrated on some blue chips that are very sensitive to political events and changes in macroeconomic factors:

Itau (Itausa and ItauUnibanco): 14.23% of the index

Petrobras (ON and PN): 11.45%

Bradesco (ON and PN): 9.90%

Vale (ON and PN): 5.80%

What happened in 2021

At the beginning of 2021 the market expected a year of growth, albeit moderate (+ 2%), of the Brazilian economy. Although the pension reform was approved, the political terrain remained rough, with the Bolsonaro government always seeking parliamentary support for reforms and privatizations. Bolsonaro also increased the uncertainty, with some interventionist sorties on Petrobras’s pricing policy that created panic among investors.

In the first days of March, the Bovespa index collapsed again with the news of the cancellation of the sentences of former president Lula, which put him back in the running for the presidential elections of 2022.

At the same time, the Brazilian currency also suffered a collapse, reaching its historic low: 1 US$ = R$ 5.78 and 1 Euro = R$ 6.85, on 8 March 2021.

In the spring of 2021, thanks to the strong growth in commodity prices, the scenario improved and both the stock market and the real rose significantly.

On 7 June 2021, Ibovespa reached its all-time high (130,776 points) and the Brazilian currency had strengthened at the same time (5.04 reais were enough to buy one dollar; 6.14 to buy one euro). On that day, Bovespa’s performance was + 15% in dollars and + 16% in euros compared to the beginning of the year.

The strong recovery of the Brazilian economy in the early months of 2021, due to the reopening of industrial and commercial activities, and the excellent economic results of the companies (especially those related to commodity exports) made us think that 2021 would be extremely positive.

Since July, the economic climate and the international scenario have changed.

On the domestic front, concern has grown over the fiscal situation, exacerbated by the default on the payment of “precatorios” and by the law on taxation on corporate dividends. With the presidential elections at the end of 2022 approaching, it has become clear that Bolsonaro will want to play the populist card, increasing public spending and risking driving Brazil towards a fiscal abyss.

There were also factors of concern on the international front: China’s decision to decrease steel production (with a strong impact on Brazilian companies such as Vale and CSN), the crisis of the Chinese real estate giant Evergrande, the inflationary tensions in the USA that have pushed the FED to announce a possible anticipated hike in interest rates.

From July to December 2021 there were six months of continuous declines for Bovespa, which has lost 20% since its peak in June 2021.

At the beginning of December 2021, the Brazilian stock market had the second worst performance in the world, losing only against the Venezuelan stock market:

 Change in local currency in 2021
HSI Hong Kong-13,8%
IPSA Chile+7,3%
FTSE UK+9,3%
Dow Jones+12,7%
FTSE MIB Italia+16,1%
MOEX Russia+ 18,3%
NIFTI 50 India+ 21,5%

Inflation and interest rates

2021 will be remembered, among other things, as the year of the return of inflation around the world. In Brazil, the 2021 inflation rate was 10%.

The discount rate (SELIC) has increased from its all-time low (2%) in January 2021 to 9.25% at the end of the year.

The rise in interest rates caused a shift in liquidity from variable-income securities (in particular equities) towards fixed-income securities (government bonds, certificates of deposit, savings books, etc.). For the state, financing public debt has become much more expensive.

The p / E indicator

While the value of Brazilian equities fell sharply in 2021, their profitability continues to be high.

In fact, if we observe in the graph below the trend of the P / E (share price / earnings per share) indicator of the shares listed on Bovespa over the last 5 years, we see that starting from November 2020 its value suddenly increased from 15 to 22, before falling to 10 towards June 2021 and collapsing to 7 at the end of 2021.

(source: OCEANS14)

If we consider that the P / E of shares listed in the S&P 500 index is today at 28 and the NASDAQ at 38, it is clear that Brazilian shares – on average – are very cheap.

The “bubble” that was created a year ago has burst and prices are once again very attractive.

Here is an example of the P / E of the most capitalized companies at Bovespa:

In 2021, foreign investors took advantage of low prices and returned to investing in the Brazilian stock market. In the year, the positive balance was equal to R $ 70.8 billion; this is the first year with a positive balance since 2017. In 2020, foreign investors had withdrawn R $ 31.8 billion from the country.

If the Brazilian equity market closed 2021 in negative it was therefore not the “fault” of foreign investors.

With interest rates expected to rise in the US, it is difficult to predict what will happen in 2022. While prices continue to be very attractive, the risk may be considered too high.

Foreign participation in the secondary market (thus excluding IPOs and new issues) is equal to 50% of the total.

The scenarios of 2022

  1. International economic scenario

The Fed has announced that it will proceed to raise interest rates at least 3 times in 2022, in order to contain the growth of inflation (to 7% in 2021). With the end of expansionist monetary policies in the US and Europe, emerging countries are likely to see a decline in inflows, especially towards high-risk investments, such as the stock market.

On the other hand, the hoped-for exit from the pandemic should favor the consolidation of the growth of the main world economies. For Brazil it means a potential growth in exports of its commodities and related prices.

b. Internal economic scenario

The growth of Brazilian GDP in 2021 (+ 4.5%) exceeded expectations, but suffered a sharp slowdown in the last quarter. Growth forecasts in 2022 are not rosy, a year of near stagnation if not recession is expected.

Inflation at 10% has led Banco Central to strongly increase interest rates, which will have an impact on the growth of companies and on investments at higher risk.

The fiscal problems are expected to worsen, as the slowdown in growth tends to decrease tax revenue and the cost of debt will rise due to rising interest rates.

c. Internal political scenario

2022 is the year of presidential elections. This means a “relaxation” of fiscal policy which, together with the problems mentioned above, can cause an irreversible chasm in the state coffers.

The reforms and privatizations promised at the beginning of the Bolsonaro government have been shelved (indeed, buried), now it is a struggle to win votes at any cost.

The Bolsonaro-Lula polarization can lead to severe turbulence on the markets: on the one hand due to Bolsonaro’s populist economic policy (already in place), on the other due to Lula’s equally populist (and considered anti-market) promises.

d. Exchange

The valorization of the real expected in 2021 has not occurred and there are no signs that this will happen in 2022.

Today the dollar is quoted at R $ 5.51 and the euro at R $ 6.30.

With the stress of the election, the foreign exchange market is likely to become something of a rollercoaster, especially between August and October.

What to expect from the Brazilian stock market in the coming months?

Some financial institutions consulted by InfoMoney at the beginning of 2002 provided the following forecasts on what level the Bovespa index could close the year, in a “normal” scenario (neither optimistic nor pessimistic):

InstitutionProjection Ibovespa late 2022
Goldman Sachs116 mila p+10,66%
Ativa Investimentos117 mila points+11,62%
Morgan Stanley120 mila points+14,68%
XP Investimentos123 mila points+17,34%
Bank of America125 mila points+19,25%
Santander125 mila points+19,25%
Bradesco BBI130 mila points+24,02%
BTG Pactual132 mila points+25,93%
JPMorgan133 mila points+26,88%
BB Investimentos137 mila points+30,70%
Average125.800 points+20%

Given that in 2021 no institution had predicted a loss of Ibovespa, these forecasts should be taken with great caution, perhaps as a signal of the current market sentiment.

To see the complete InfoMoney article: https://www.infomoney.com.br/mercados/o-que-esperar-para-o-ibovespa-em-2022-confira-a-projecao-dos-analistas-e -as-acoes-em-destaque /

The big unknown is the presidential election in October and the electoral campaign that will precede it. Aware of having lost a lot of support, Bolsonaro will play everything out, and this will translate into a sharp increase in public spending and therefore a great imbalance in public finances. His main opponent, ex-president Lula, already speaks of wanting to review the labor reform (“Trabalist”) and the “PEC do teto” (which imposes a ceiling on the state’s spending and a fiscal balance objective “) . Basically, both Bolsonaro and Lula will adopt potentially explosive behavior and speeches for public finances, and this can enormously affect the economy and the performance of the Brazilian stock exchange.

As also happened in 2021, it is very likely that some populist declarations by presidential candidates will cause sudden collapses of the Brazilian real: control of fuel prices, state control of some companies, cancellation of reforms, donations of benefits to some categories of workers , etc.

On the other hand, the share prices of many Brazilian companies listed on the stock exchange are extremely discounted: even in a scenario of low economic growth, their profitability is such as to predict their valuation in the course of 2022.

The success of the vaccination campaign should lead to a substantial improvement in the health crisis and allow a return to normality in many sectors still penalized, such as services (commerce, tourism, catering, etc.).

In 2022, at least until the presidential elections, it will be necessary to navigate on sight, seize the opportunities that will be created and not excessively expose oneself in those sectors most subject to the populist interventionist desires of the candidates.

Note: those interested in the historical trend of the daily prices of the Bovespa index, real / euro and real / dollar exchange rates of the last four years, can receive it for free in Excel format by requesting it from: info@updatebrazilconsulting.com