2021 was a difficult year for the Brazilian stock exchange, but all the main analysts predicted a very positive 2022, with an average growth of 20% in the index. Once again analysts got their forecasts wrong, but it must be said that Ibovespa and Brazil in general surprised with a positive performance, better than that of the American and European markets.

Here is the trend of the Bovespa Index (Ibovespa) from January to December 2022:

+ 5.6% in reais

+ 19.9% in euros

+ 13.2% in dollars

During 2022, the real appreciated by 6.6% against the dollar and 11.8% against the euro (therefore the euro depreciated by 6.1% against the dollar), and this explains the better performance of the Bovespa in European currency against the dollar

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

 end 2021end 2022
DollarR$ 5,66R$ 5,28
EuroR$ 6,40R$ 5,64

And here is a comparison of the performances of Bovespa, Dow Jones and FTSE Mib (Milan stock exchange) in 2022:

 end 2021end 2022Variation in US$Variation in EuroVariation in Reais
Dow Jones Index3640733147-9,0%-2,4%-15,1%
FTSE MIB2773024056-19,1%-13,2%-23,6%

Those who invested 10 thousand dollars in the Brazilian stock exchange in January 2022, at the end of the year found themselves, gross of various commissions and taxes, around 11,320 dollars. Excellent investment. If he had invested them in an equity fund that reproduced the DJI, at the end of 2022 he would have found himself with 9,000 euros; if he had invested them in a fund linked to FTSE MIB, the euros at the end of the year would have been US$ 8,100.

Conversely, a Brazilian who had invested 10,000 reais in the USA or Italy would have found a nest egg of only 8,490 and 7,640 reais respectively at the end of 2022, instead of the 10,560 reais invested in Bovespa.

Therefore, contrary to what happened in 2021, investing in the Brazilian stock exchange in 2022 was by far the best investment among those analysed.

If we consider that annual Brazilian inflation in 2022 reached 5.62%, the Bovespa closed in perfect equilibrium in terms of local currency.

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 2022

At the beginning of 2022, the market forecast a year of stagnation for the Brazilian GDP (+0.3%). Inflation exceeded 10% and the Banco Central had raised the discount rate (SELIC) to 10.75%.

Thanks to the improvement in the pandemic, however, the economy was reopening and unemployment was showing signs of improvement.

Even the real, one of the most devalued currencies in the world in 2021, has shown signs of strengthening against the dollar and euro. Thanks to very attractive interest rates and the presence of highly devalued assets in 2021, the entry of speculative investments from abroad in January/February was very large.

The invasion of Ukraine by Russia had – paradoxically – a positive effect for the Brazilian economy: sharply rising commodity prices, growth of the stock market, further strengthening of the real.

Ibovespa closed the session of 7 April 2022 at 118,862 points, +14.4% compared to the close at the beginning of January (103,921 points on 3 January 2022). In just 3 months the growth was +37% in dollars and +42% in euros.

Brazil therefore seemed to have once again become one of the favorite countries of international investors. In the first three months of 2022, the net balance (income – outgoing) relating to foreign investors alone on the Brazilian stock exchange amounted to almost 64 billion reais, more than half of that for the whole of 2021 (104 billion reais).

As early as mid-April the situation changed: inflation at 12%, discount rate at 12.75%, increase in interest rates in the USA prompted foreign investors to realize part of the strong gains made in the first quarter. On the other hand, forecasts regarding the growth of the Brazilian GDP for 2022 improved (+1.2% at the beginning of June) and unemployment decreased.

After the strong rally at the beginning of the year, the real depreciated again, mainly against the dollar. (we recall that in June 2022 the euro weakened significantly against the dollar, going from 1.07 to 1.01).

The month of August 2022 was exceptionally positive for the Brazilian economy: growth forecasts for 2022 GDP (+2.6%), unemployment still falling, inflation cooling, improvement in the public deficit. It was a positive month for equity assets, going against the trend of the American and European stock exchanges.

At the beginning of October, Lula won the first round of the presidential elections and the market reacted positively to the news: in October, the Ibovespa rose by 6.3% and the real appreciated against the dollar and the euro.

However, after Lula’s victory in the second round, things changed. Having abandoned the moderate and conciliatory tone of the electoral campaign, Lula has sown uncertainty regarding the guidelines of the new government’s economic policy. Fears of an abandonment of the spending ceiling and a populist economic policy by the new government provoked a reaction from the financial markets. In November and December, the Brazilian stock market lost 10% and the real depreciated by 6% against the dollar.

Despite the deterioration of the last two months, Bovespa had a very good performance in 2022, as also shown by the table below:

 Change in local currency in 2022
IPSA Chile+13,8%
FTSE UK+0,9%
NIFTI 50 India-0,2%
Dow Jones-9,0%
FTSE MIB Italia-13,2%
HSI Hong Kong-16,5%
MOEX Russia-42,6%

Inflation and interest rates

In the last months of 2022, inflation in the main world economies showed signs of slowing down.

In Brazil, after reaching a peak of 12% in June, inflation began to decline, ending the year below 6%. However, the Banco Central has not yet started to decrease the discount rate (SELIC), today at 13.75%, and a significant drop is not expected in 2023 (the forecast is that it will drop to 12.25% at the end of the year).

The differential with respect to the rates set by the FED and the ECB is still very high, but should decrease in 2023, given that the cycle of increases in the USA and Europe should continue at least until the end of the first half.

The maintenance of high interest rates should also favor fixed-income investments (government bonds, certificates of deposit, savings accounts, etc.) in 2023 to the detriment of equity investments.

The p / E indicator

Although the value of Brazilian equities has increased in 2022, their profitability continues to be high, especially when considering their value in dollars and euros.

In fact, if we observe the trend of the p/E indicator (share price / earnings per share) 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, to then drop to 10 towards June 2021 and collapse to 7 at the end of 2021, to remain stable until the end of 2022.

(source: OCEANS14)

If we consider that the P/E of the shares listed in the S&P 500 index is now at 21 and the NASDAQ at 28, it is evident that Brazilian stocks – on average – are still very cheap.

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

In 2022, foreign investors returned to investing in the Brazilian stock exchange. In the year, the positive balance amounted to R$ 100.8 billion.

In 2021, B3 (which manages Bovespa) had mistakenly reported a positive balance of R$ 70.8 billion: recalculating, a net outflow of R$ 7.1 billion was found.

With the expected rise in interest rates in the US it is difficult to predict what will happen in 2022. Even if prices continue to be very attractive, the risk could 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 2023

  1. International economic scenario

– After several interest rate hikes by the FED during 2022, US inflation has finally begun to decline, but there is still a long way to go before returning to levels considered acceptable (around 2% per year). Although Jerome Powell continues to declare that the war on inflation is a priority and will continue into 2023, the market expects the time for the first interest cuts to be approaching, perhaps as early as the end of 2023.

– A recession, even if mild and short-lived, in the second quarter of 2023 is considered probable by many economists and also by the IMF.

The uncertainty surrounding the development of Russia’s invasion of Ukraine also weighs heavily, especially for the European economies and for the trend in commodity prices.

– The Chinese economy, after the post-Covid reopenings at the end of 2022, should once again be a driving force, favoring a growth in commodity prices.

In this unpredictable and complex scenario it is impossible to make reliable forecasts, but certainly Brazil can take advantage – once again – of the probable growth in demand and in the prices of commodities worldwide.

Much will depend on the US economy: will strong rate growth in 2022 (which will continue in 2023) cause a “hard” or a “soft” landing?

b. Internal economic scenario

Brazilian GDP in 2022 grew well beyond the best expectations (about +3%) and all economic indicators are improving, from inflation to unemployment, from the exchange rate to the balance of payments. A significant slowdown in the economy is expected for 2023, but it is not said that Brazil will not know once again how to exploit the turbulence in the world economy to its advantage.

c. Internal political scenario

– The elections showed a Brazil divided into two factions: the anti-Lula and the anti-Bolsonaro. It will above all be the task of Lula, who will govern for the next 4 years, to restore greater serenity in relations between the two sides. And he will have to demonstrate that the PT will not repeat the mistakes that led to the major corruption scandals of the past years: only in this way will it be able to recreate the political dialectic (which does not exist today) necessary to govern the country.

On the other hand, with the election of Lula, Brazil tends to reopen itself to the world and can once again have a greater geopolitical weight, above all by once again becoming the protagonist of the global environmental agenda. But the uncertainties remain about his government’s economic and fiscal policy, which weigh on both domestic and foreign investment decisions.

If the government is able to resist the temptation of a populist economic policy and if it initiates reforms (tax and administration), the 2023 scenario could turn out to be extremely positive.

d. Exchange rates

2022 saw a significant appreciation of the real, difficult to predict at the beginning of the year.

Today the dollar is quoted at R$ 5.15 and the euro at R$ 5.57.

Is there room for further appreciation of the real against the dollar in 2023? There is certainly space, given that the exchange rate deemed “fair” (based on the fundamentals of the Brazilian economy compared to the US one) is around R$ 4.50.

Much will depend on the ability of the Lula government to guarantee a fiscal balance and of the Banco Central to further reduce inflation, as it has demonstrated its ability to do. And if the demand for commodities were to grow as expected, the entry of hard currency could guarantee a strengthening of the Brazilian currency.

But the foreign exchange market is the most unpredictable of all, so all that remains is to continuously monitor the opportunities that will arise during 2023.

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

Some financial institutions consulted by ValorInveste at the beginning of 2023 provided the following forecasts on what level the Bovespa index could close the year:

InstitutionProjection Ibovespa late 2023
Goldman Sachs116.000
Ativa Investimentos125.000
Morgan Stanley125.000
XP Investimentos125.000

Given that in 2021 and 2022 no institution correctly predicted (with a margin of error of less than 10%) the outcome of the Ibovespa, these predictions should be taken with great caution, only as a signal of current market sentiment.

In defense of analysts, it must be said that the invasion of Ukraine by Russia, with all its consequences on the world economy, was not foreseeable at the beginning of 2022.

At the moment, the major international variables concern:

– Progress of the Ukraine-Russia conflict

– Soft landing/hard landing of the US economy

– Recovery pace of the post-Covid Chinese economy

– Inflation trend in the USA and Europe


– Management of economic policy by the Lula government

– Fiscal balance

– Progress of the reforms

If the Lula government manages to avoid embarking on a populist economic policy (e.g. a revival of the disastrous “matriz economics" implemented during the presidency of Dilma Rousseff) and to find consensus to carry forward the tax reform and administrative reform, 2023 could reserve excellent surprises in terms of growth of the economy and the value of shares.

The world looks at Lula with great sympathy (as opposed to how it looks at Bolsonaro) and is ready to give him credit and invest in Brazil, if he demonstrates responsibility in managing the “administrative machine”.

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