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News from Faria Lima, by Capital Aberto
The best from Capital Aberto – for 20 years, a reference in objective, impartial, and in-depth information about the Brazilian capital market.
News from Faria Lima, by Capital Aberto

Local scenario deteriorates and puts bearish pressure on the Ibovespa

May 24, 2024

Contrary to global trends, where stock markets are reaching historic highs, the Ibovespa has been deteriorating month by month in 2024. This decline is not only due to the expectation that the cycle of interest rate cuts in the United States will start at the end of the year or in 2025, but mainly due to the deterioration of public accounts.

Last month, Finance Minister Fernando Haddad announced a change in the 2025 fiscal target from a 0.5% GDP surplus to a zero deficit. Moreover, the climatic disaster that devastated Rio Grande do Sul, requiring billions of reais for reconstruction, adds further difficulty to achieving this target, though the exact costs remain uncertain.

Interestingly, the negative scenario for the B3’s main index materialized only slightly, with the Brazilian stock market closing 2023 at record levels, at 134,000 points. To illustrate, the Ibovespa has accumulated a 7.05% decline until the close of this Thursday (23), standing at 124,729 points, a loss of 10,000 points during this period.

A survey by TradeMap shows that pessimism about the Brazilian stock market consolidated in the first months of 2024. In January, the Ibovespa fell by 4.79% due to a correction of the euphoria seen at the end of last year, following the reversal of expectations for interest rate cuts in the United States.

Additionally, Brazilian inflation is projected to exceed the 3% target ceiling this year, according to this week’s Focus Bulletin. Market analysts consulted by the Central Bank (BC) forecast the Broad Consumer Price Index (IPCA) to rise from 3.76% to 3.80% in 2024, and from 3.66% to 3.74% in 2025.

As a result, investors are opting to move away from variable income and towards fixed income, or even US bonds, which are the safest in the world, especially now with uncertainty about the Federal Reserve (Fed) cutting interest rates due to persistent inflation and economic activity.

“This uncertainty (public accounts) will continue to push the stock market slightly lower towards the end of the year,” says Sidney Lima, an analyst at Ouro Preto Investimentos. According to him, there is also resilience in the US market in terms of employment and economic growth, which stokes inflation and Brazil imports this higher inflation as well.

Despite this, Lima believes that things will eventually align, although the outlook is not very encouraging for stocks. “I believe that 2024 might be a bit more complicated. My perspective is that we will end the year around the levels (Ibovespa) we are witnessing today.”

Enrico Cozzolino, partner and head of analysis at Levante Investimentos, notes that Brazil failed to capitalize on the positive rally of foreign markets due to severe local political noise, with government comments on fiscal indiscipline, goal flexibility, lack of clarity on public policies, and the fiscal framework.

“It needs to be comprehensive. We see several patches, some rhetoric about taxing large fortunes, as Lula commented. All of this is very bad, not in the sense of whether it is right or wrong to tax large fortunes, but in how it will be implemented,” says Cozzolino.

Cozzolino further explains that this tumultuous scenario deters foreign capital. On May 21, the latest public data from B3 indicated that foreign investors withdrew R$235.1 million (US$ 45.66 million) from the secondary market (listed shares). Thus, the category had a surplus of R$1.2 billion (US$230 million) in May. However, in 2024, the deficit is R$33.06 billion (US$ 6.42 billion).

“Now, it remains to be seen if all this noise will become reality. If the statements are clarified or retracted, as has been the case all year, we will have a good risk-return ratio and the (Ibovespa) could return to 129,000 points,” Cozzolino concludes.

From a technical analysis perspective, things do not look good either. In a recent report, Itaú BBA states that the Ibovespa is close to a floor that could lead to significant declines.

After nearly three weeks stuck between 130,000 and 127,100 points, the Ibovespa fell below the 127,100-point region and is pointing towards the support region at 123,300 points, according to the bank’s technical analysis team.

Analysts Fábio Perina, Lucas Piza, and Igor Caixeta view this region as important not only in the short term but also because it coincides with the 200-period moving average. “The very challenging short-term scenario puts pressure on the 200-period moving average region,” says the report.

In the medium term, according to the bank, as long as the index remains above its 200-period moving average, the main target for 2024 continues to be the 150,000-point region.


Market positions for “Trump Risk” keep dollar pressured

May 21, 2024

Amid a global scenario of rising inflation and uncertainty about the Federal Reserve’s interest rate cuts in the United States, which have been guiding investment trends and monetary policies in many other countries, protective assets (hedges) such as the dollar and gold are once again attracting market attention. The U.S. election year, with the possibility of a tight race between Donald Trump and Joe Biden, also weighs heavily, especially on the dollar. Gold demand in the first quarter, excluding the over-the-counter market, fell 5% year-over-year to 1,102 tons due to ongoing ETF outflows, according to the World Gold Council. However, including over-the-counter purchases, total gold demand rose 3% year-over-year to 1,238 tons – the strongest first quarter since 2016.

“During much of the quarter, investors seemed to focus on the resilience of the U.S. labor market and hotter-than-expected inflation results, which further pushed back rate cut expectations. The strength of the stock market further diverted investors’ attention from gold,” says the World Gold Council report, explaining the ETF outflows backed by the commodity. Global gold ETF holdings decreased by 114 tons in the first quarter (a drop of $6 billion), and over-the-counter market investment of 136 tons was a major contributor to total demand and pushed gold prices to record levels in March.

Dierson Richetti, a capital market specialist and partner at GT Capital, points out that gold has been rising gradually since the start of the Russia-Ukraine war. “In recent months, this rise has been due to several reasons such as global conflicts, Russia and Ukraine, Israel and Hamas, conflicts in ship traffic areas, a possible American recession, and the lack of control over inflation in the United States. This creates anxiety and risk aversion. Therefore, people opt for a reference, which is gold,” says the specialist. “100 grams of gold will always be 100 grams of gold. We are very much in search of this protection, mainly due to risk aversion. Today, the price per gram of gold is around R$ 380 (US$ 73.67)  and it doesn’t drop to R$ 200 (US$ 38.78) overnight. It may rise, but this rise is gradual, a little each day.”

Also according to the World Gold Council, gold investment in the first quarter, excluding the over-the-counter market, fell 28% year-over-year. The strength in total bar and coin investment is attributed to dynamic demand for small gold bars, offset by a drop in demand for gold coins, reflecting, in part, a divergence in investment behavior between the West and the East, evident in all areas of gold investment during the quarter: profit-taking by Western investors contrasted with largely unilateral investment demand in Asia.

“Global gold ETFs recorded an eighth consecutive quarter of outflows. Despite a 114-ton decline in ETF holdings, assets under management (in U.S. dollars) reached their highest value in nearly two years, at $222 billion, thanks to the strong performance of gold prices,” says the document.

Although over-the-counter market demand is not directly observable, the positioning of speculative investors in the U.S. futures market can indicate that net long positions held by fund managers saw a sharp increase throughout March, reaching their highest level in two years, around 540 tons. “Comparable movements were observed in Chinese futures markets at the end of the quarter and, more significantly, in April. Similar to the changes reported last year, over-the-counter market volume also included purchases by high-net-worth individuals in various markets, as well as healthy stock accumulation in markets across Asia.”

While gold ETFs struggle with profit-taking, the dollar seems to be gaining strength. Alexandre Viotto, head of banking and exchange at EQI Investimentos, points out that exposure to future dollar contracts has increased, especially in funds and ETFs.

“What we have seen month after month is that bets on B3 for a dollar appreciation, meaning a devaluation of the real, have been increasing. This says a lot. And what have companies been doing? They have been positioning themselves by making currency hedges, mainly,” says Viotto. “We have seen this at our desk, with importers or companies that have obligations in dollars, making NDFs, which are future dollar purchases, or just making currency swaps, exchanging debts that were in dollars for debts in reais.”

In addition to funds and ETFs for investors who typically seek dollar protection, EQI observed that companies with future obligations in foreign currencies have been hedging more than they did last year. “This is a movement we have seen and expect to intensify in the second half of the year, in our opinion.”

Another factor that led to the revision of expectations for the dollar is that the Brazilian currency has lost strength compared to others due to the interest rate differential. Brazil had a much higher local interest rate differential, the carry trade, than it does now. The risk premium that previously existed for investors to put money in Brazil, a relatively stable country but with a high rate of return, began to diminish compared to other countries like Turkey, South Africa, and Mexico, which started to become a bit more attractive, causing the real to suffer.

Given this depreciation of the Brazilian currency and expectations regarding Fed rate cuts, which may not happen this year, the outlook for the dollar is much more bullish than bearish. Consequently, future dollar exposure has increased for various investors seeking protection.

In Brazil, initially, the forecast for the dollar at the beginning of the year was a decline. “The expectation was to reach R$ 4.50, but due to internal political events and external factors, with U.S. interest rates not falling in the short term, the scenario changed, and the expectation for the dollar, at least until the end of the year, is much more bullish than bearish, which favors the currency and interest rates. This is why the Central Bank is now slowing down the Selic rate cut, weakening the stock market in the short term,” comments Rodrigo Cohen, CNPI analyst and co-founder of Escola de Investimentos, a financial education company.

Regarding the international scene, the currency also gains strength. “We will now have the euro decline in the next meeting, initially in June, when Christine Lagarde, president of the European Central Bank, is expected to start the cuts, before the United States, due to much better macro data, especially inflation, which is initially under greater control, strengthening the dollar globally, along with U.S. indices, S&P, Dow Jones, with the U.S. dollar favored worldwide,” Cohen points out.

For Viotto at EQI, despite the Focus bulletin on Monday (20) indicating the dollar at R$ 5.04 by the end of the year, this view is somewhat optimistic. The firm expects more volatility in the second half of the year, precisely because of the U.S. election.

“We have seen the real against the dollar operating above R$ 5.10 for a while. Our exchange desk believes in the dollar at R$ 5.30, R$ 5.40 in the coming months. With the U.S. election approaching, the tendency is for the dollar to become a bit more volatile in the second half of the year,” says the head of banking and exchange.

Viotto believes that the U.S. “safe haven” should continue to appreciate and recalls the phenomenon that occurred when former U.S. President Trump was elected, where commodities and the dollar, typically inversely proportional assets, rose in price simultaneously for about three or four months before normalizing. When Trump took office, with the “America First” agenda, the promise was to invest in infrastructure. As the American market bought more iron and commodities for these investments, commodity prices rose. When he took office and couldn’t implement the policy as intended, the situation reversed. The specialist notes that the former U.S. president became more protectionist against China and other places, and the dollar remained strong while commodities fell, also negatively impacting Brazil.

“Let’s say Trump is indeed elected; it’s very likely that he will come with a similar idea. As the world moves in cycles and they tend to repeat, my impression is that if he is elected and starts to surge in the polls when the campaign heats up, the dollar is likely to appreciate more due to this Trump risk,” says Viotto from EQI Investimentos. “It could be that next year, if we have a slightly better fiscal condition, the dollar might hover around R$ 5 or even below. But I don’t see, given the current scenario, a downward trend for the dollar; I think the trend is upward.”


New investment cycle of Big Techs requires investor patience

May 20, 2024

Big tech companies, like any major industry, go through cycles of increased costs and investments to adjust their business models or adapt to the new economic and technological realities that increasingly demand immediate solutions.

For instance, 2023 can be considered a year of efficiency for tech companies, with cost and personnel adjustments to prepare for a new era on the horizon. Leading the way are Meta, Microsoft, and Google, while Apple and Amazon follow closely behind.

With Artificial Intelligence (AI) poised to be the main business focus for big techs moving forward, according to experts consulted by Capital Aberto, the expectation is that these companies will start a new cycle of substantial investments. However, the return on these investments is expected to take longer, with the results taking more time to reflect in their revenues.

This raises the question of whether it is worth waiting for the completion of this new investment cycle and holding onto these stocks, or if it’s better to rebalance the portfolio, keeping some of them since not all are expected to perform the same in the short term.

“Microsoft and Meta, especially the latter, will likely take longer to see returns on their investments compared to previous cycles, although we can already see some investment in the cloud. 2024 will be a year of more patience, with higher costs and capital expenditures, with revenues taking a bit longer to materialize,” comments Thiago Kapulskis, a big tech analyst at Itaú BBA.

Despite this, Kapulskis explains that each case is unique, as companies are in different investment cycles. For example, Microsoft and Meta have a positive history of capital allocation across various cycles, providing a clearer view of how they will position themselves and seize opportunities in AI.

On the other hand, Google, Apple, and Amazon generate a bit more uncertainty due to their respective stages. While Alphabet, Google’s parent company, will need to spend more to defend rather than attack the competition, focusing on Google Cloud, Apple will need to launch new products, and Amazon will likely focus on investment in e-commerce and AWS, its cloud computing service.

“Looking at capital expenditures, we see a considerable increase in investments over the past years, from Meta, Microsoft, and Google. All these companies, including Amazon, are expected to see even higher capital expenditures over the next 12 months or so,” explains Kapulskis.

For Google, another significant issue, according to Kapulskis, is the legal risks involving the American judiciary, which could significantly impact the company’s future results.

The Itaú BBA analyst explains that antitrust proceedings have been ongoing for some time at the Federal Trade Commission (FTC) and the US Administrative Council for Economic Defense (Cade), questioning Google’s agreements with telecom companies and Apple, which received economic incentives to drive traffic to Google.

“One possible outcome of the process could be some economic restrictions. Depending on what happens, it could be very detrimental.”

For XP, everything seemed to be going well with Meta after a series of surprisingly strong results in recent quarters until Mark Zuckerberg, the company’s founder, stated after the first-quarter results that second-quarter revenue might be in line or below market expectations. Additionally, he said the company would need to spend heavily in the coming years to develop its AI capabilities.

The problem with all this, according to XP analysts Paulo Gitz, Maria Jordão, and Jennie Li, is that Meta lacks a clear monetization strategy.

On the other hand, Microsoft appears to be the positive consensus among experts regarding future expectations. In its report, XP highlights that the company founded by Bill Gates continues to deliver good results across all business lines and has a clear monetization strategy for its AI investments, whether through the sale of its Copilot Pro service to Windows users or through language processing and applications in its cloud arm, Azure, which is gaining market share.

The same positive future outlook is shared by Gerson Brilhante, an analyst at Levante Inside Corp. According to him, Microsoft seems to be the best prepared to operate with AI, even in the long term. “Microsoft appears to be the company most apt for Artificial Intelligence and one of the best prepared to capitalize on this movement.”

With a short-term outlook that isn’t so positive and an uncertain future due to the new investment cycle, the expectation is that big tech stocks may suffer a bit more moving forward, unlike what we’ve seen in recent months.

A study by TradeMap shows that Meta, Microsoft, Google, Apple, and Amazon stocks saw strong gains over the past 12 months, with increases of 98.12%, 35.05%, 45.69%, 10.34%, and 61.90%, respectively. In 2024, up to April, the performances are mixed, with Alphabet rising 16.57%, Microsoft up 3.56%, Apple down 11.57%, Meta up 21.53%, and Amazon up 15.73%.

“Last year was spectacular for these companies on average, with Meta rising almost 400%. Generally, they performed well. This year should be one of stabilization because higher costs bring the possibility of estimate revisions and worse results, a more negative than positive asymmetry in the short term,” says the Itaú BBA analyst.

Predicting a collapse of big techs, UBS downgraded their recommendations from ‘buy’ to ‘neutral’ in April, not because of stretched valuations or doubts about the future of AI, but due to the new investment cycle and a recent past of difficult comparison bases, along with cyclical forces that are expected to weigh on the stocks.

In its report, the bank explains that big tech earnings per share growth is expected to drop from 42% to 16% over the next year. “The moment now is for a recovery in other tech stocks and companies in other sectors of the economy.”

However, some hold a different view. According to Brilhante, it’s time to hold onto the stocks, as intensive investments by big techs won’t yield immediate results. “It’s normal for results to be somewhat affected in the short term, causing some distortion in valuations. But in the long run, these companies as a whole tend to see a significant boost in productivity, significantly increasing their profits.”


How private credit funds manage risk after the Americanas case

May 17, 2024

The market took a hit with the Americanas case in January 2023 when the then CEO, Sergio Rial, former Santander Brazil, announced that the company had accounting inconsistencies amounting to R$ 20 billion (U$ 3.92 billion). After the announcement on January 11, governance and risk management in the credit sector were put into question. The discovery of these accounting inconsistencies continues to reverberate, highlighting the need for new risk management strategies in private credit funds, as well as the discussion of new rules for B3’s Novo Mercado, to include improvements in the reliability of financial statements and the boards of participating companies.

Before the scandal, Americanas was considered a solid company, well-rated by credit rating agencies worldwide. Fitch, for instance, assigned a global credit rating of ‘BB’ to the company, indicating a good capacity to meet commitments. Moody’s had a Ba2 rating, while S&P rated it ‘BB’. After the case was disclosed, the company’s credit ratings fell to speculative grade.

For context, in December 2022, just before the announcement of the inconsistencies, the amount of BTOW15 debentures from Americanas held by private credit funds was R$ 117.7 million (U$ 23.05 million), while for LAME4, LAME5, LAME6, and LAME7 these amounts were R$ 478.5 million (U$ 93.69 million), R$ 491.9 million (U$ 96.31 million), R$ 148.7 million (U$ 29.12 million), and R$ 1.9 billion (U$ 370 million), respectively, according to Economatica.

BB Asset, which had significant exposure to the company through its private credit funds, recalls that Americanas had one of the highest corporate governance scores in Brazil, being part of more than 10 governance indexes, including the Corporate Sustainability Index and differentiated corporate governance, which increased the surprise and impact on the market. “It was among the top 15 companies in this regard in Brazil. And then we discover all this. Who didn’t have exposure? Americanas was an event that affected the fund industry, the capital market as a whole. We also had a significant exposure of our assets under management, and we are the largest manager,” says Flávio Mattos, Fixed Income and Currency Investment Funds executive at BB Asset.

On January 31, 2023, after the announcement of the billion-dollar hole, according to Economatica, private credit funds accumulated a total of R$ 51 million (U$ 9.99 million) in BTOW15, R$ 121.1 million (U$ 23.71 million) in LAME4, R$ 128 million (U$ 25.06 million) in LAME5, R$ 39.4 million (U$ 7.71 million) in LAME6, and R$ 785.1 million (U$ 153.72 million) in LAME7.

Another manager with exposure to Americanas at the time, Western Asset, has not used rating agencies as inputs for its analyses. Adriano Casarotto, credit manager at Western, cites the case of Vibra, which failed to pay a CRI on one side and made an issuance on the other for the market, and was rated AAA.

“We questioned the rating agency. I think there’s some homework that the rating agencies need to do, which we understand is being done poorly because they always end up lagging behind events. Every analysis we do, whether qualitative or quantitative, we do internally,” says Casarotto. “The rating agency is always a reference and the market looks at it a lot. It’s a public rating, which has its methodology and, in many cases, we question the agency’s methodology. Because it seems that this issue, which is much more qualitative of the issuer analysis, is more about the willingness to pay than the capacity to pay. It is very neglected, in general.”

Mattos, from BB Asset, says he doesn’t see much evolution in the market after the case and that there aren’t many changes in practice, after all, there was no punishment for those involved, and he mentions that when a credit analysis is done, the market is forced to trust financial statements. Today, according to him, there is even a consultation at Anbima, a credit committee, to give access to the SCR system and allow consultation of the debts of companies registered with banks. “But until then, we have to trust the financial statements. If companies say their liabilities amount to X, we wouldn’t need to go to the Central Bank’s system to check if that debt on the balance sheet is indeed the one that banks are lending. Theoretically, it’s something we should trust.”

After the incident, BB Asset has been working more closely with the credit analysis of the companies issuing the credit securities. “We have been asking more questions, inquiring about the participation of board members. We ourselves participate, along with other players, also because we have equity funds in the election of independent directors, we do a ranking, check the history of these directors, precisely to avoid having all people with the same view there, and facilitate the practice of attitudes,” says Mattos.

Western Asset has also been investing in governance and risk management, especially focusing on company management and going deep into analyzing the “individuals.” At the manager, which already had a habit of extensively analyzing individuals, controllers, and managers of issuers, this practice has gained even more strength after the event.

“Depending on the characteristics, whether of the controller or administrators, we have indeed decided to disinvest from some assets. Obviously, companies related to the 3G Group we disinvested from, but we have other names that, due to our analysis, we simply preferred to stay out of, regardless of whether the company itself is financially sound for its risk or rating, we chose not to sell and stay out of these risks,” says Casarotto.

In addition to “internal analyses” and “checking the CPFs of the people involved,” Western has imposed much stricter limits for the individual allocation of credits.

“If you look at the portfolios today, they are much more diluted than they were at that time. Partly we dilute the credit position. For example, if we had a maximum of 3% before, now we have a maximum of 1% for a paper of the same risk. This is part of a process to diversify, increase, force greater diversification. Even if the rate is attractive, what we do now is force greater diversification to actually reduce the impact of an extraordinary event, like the Americanas event, on the funds’ shares,” emphasizes the credit manager at Western.

Casarotto further explains that the manager has been looking individually at each portfolio and classifying what it has in terms of expected return and limiting, to a large extent, the individual position of each risk, of each issuer, to the maximum expected return for that year.

“The trauma caused by the Americanas event brought the idea that a loss, even an unexpected one, cannot be greater than the expected return for the year. So, this is an idea that permeates all portfolios now. We don’t have any portfolio where you individually have a loss greater than the expected return for that year. The idea is precisely to have a risk linked to the expected return of each portfolio, of each fund, of each portfolio,” explains the manager.

Amid the confusion, given that Americanas had the Novo Mercado seal, it seems there was a need for reform. On May 2 this year, B3 opened a public consultation to change the rules of the segment that has the highest level of governance, whose proposals include a “reviewing” governance level seal, limits on executive boards, increased fines, and disqualification of administrators.

For the BB Asset executive, the initiative comes at a good time, but enforcement and punishment are needed to prevent this type of “event,” like the Americanas case, from happening, since the case did not have an adequate solution for those involved.

“The Novo Mercado seal issue, by itself, differentiated governance, will not help. The Americanas case made this very clear because it was part, if I’m not mistaken, of 14 indexes related to the ESG theme (environmental, social, and corporate governance) and it didn’t help much,” emphasizes the Fixed Income and Currency Investment Funds executive at BB Asset. For him, it is important that the rules be enforced with penalties.

In the evaluation of Roberto Gonzalez, a corporate governance specialist, B3’s objective is to raise the bar, given that Brazil is in the evolutionary process of governance. According to him, the rules change from time to time, but the retailer’s case accelerated the process.


Market begins to price in higher risks after Petrobras leadership change

May 16, 2024

After yet another abrupt leadership change at Petrobras, the market now turns to the potential financial and operational consequences of this move. It’s no surprise that the state-controlled company is susceptible to such situations, as political interests often overshadow shareholder interests.

With a more “pro-market” view, Jean Paul Prates, who left the CEO position on May 14, faced significant opposition in recent months, especially after clashing with the government over the distribution of extraordinary dividends totaling R$ 49.3 billion (U$ 9.62 billion). The amount was initially held in a reserve account, but half was eventually distributed as an extraordinary dividend. The government had wanted the entire amount retained.

On the same day, President Luiz Inácio Lula da Silva’s administration announced the nomination of Magda Chambriard as CEO. Chambriard is a familiar figure who worked at Petrobras for 20 years and was president of the National Agency of Petroleum, Natural Gas, and Biofuels (ANP) during Dilma Rousseff’s presidency.

However, her appointment will need to pass through Petrobras’ governance bodies, such as the board of directors. The market feels that someone with a more “nationalist” perspective has been chosen for the role. For now, the state-owned company has appointed Clarice Coppeti as interim CEO until Chambriard’s nomination passes the bureaucratic approval process.

Investors and the market are now uncertain about Petrobras’ future stance, particularly regarding investments, dividends, business plans, and operational performance.

“The sudden change in management adds significant uncertainty to Petrobras’ investment case and consequently increases its risk. This context (political dissatisfaction) will likely raise concerns among minority investors about the potential risk of interference from the majority shareholder (the government) in the company’s management,” explains Helena Kelm, Oil, Gas, and Petrochemicals analyst at XP, in a report.

According to her, investors are particularly worried about conflicts of interest, although she does not expect significant changes in dividends and capital expenditure plans in the short term. “(But) we recognize that uncertainty significantly increases the perception of risk.”

BTG Pactual’s perspective is that since the implementation of the State-Owned Companies Law in 2016, Petrobras has had several CEOs and faced considerable scrutiny over its fuel pricing strategy and capital allocation. However, in practice, there have been few tangible results leading to a significant revision of cash flow generation forecasts.

“In fact, we were positively surprised by the pragmatism of all administrations. We believe that this pragmatism will remain in place, driven by the federal government’s need to manage fiscal accounts and rigorous governance rules and profitability metrics necessary for the approval of inorganic investments,” explain analysts Pedro Soares, Thiago Duarte, and Henrique Pérez.

Mateus Haag, an analyst at Guide Investimentos, believes that the initial impact is that Prates had gained the market’s trust during his tenure, even though several changes in the company, such as fuel pricing, dividend reduction, and statute flexibility, went against value creation for shareholders. The company continued with strong operational performance and good practices.

“It appears that the president, the Minister of Mines and Energy, and the Civil House were unhappy with his performance at the state-owned company. Consequently, they replaced him with Magda Chambriard, who will likely better meet their interests. Considering that someone without sector experience and with a solely political bias could have been appointed, we find Magda suitable for the role,” Haag states.

As always happens in such situations, Petrobras’ preferred and common shares tend to be punished in the days following such events and tend to bring some volatility to the Ibovespa, as the state-owned company’s shares account for nearly 15% of the main B3 index volume.

For instance, on June 1, 2018, during Michel Temer’s administration, when then-president Pedro Parente resigned, the company’s more liquid preferred share fell nearly 15%, to R$ 5.17 (U$ 1.01), according to an exclusive survey conducted by TradeMap for Capital Aberto.

Three years later, on February 19, 2021, during Jair Bolsonaro’s administration, Roberto Castello Branco was dismissed from the position, also due to political disagreements. At the time, the preferred share fell 6.63%, to R$ 9.39 (U$ 1.83).

A year later, on March 28, 2022, Joaquim Silva e Luna left the CEO position, with the share reacting negatively and falling more than 2%, to R$ 13.36 (U$ 2.61). Two months later, on June 20 of that year, José Mauro Coelho resigned due to pressure. However, the preferred share rose 1.14%, to R$ 14.23 (U$ 2.78).

On the closing of the previous day, when Prates left his position, the preferred share fell 6.04% and the common share 6.78%, to R$ 38.40 (U$ 7.49) and R$ 40.02 (U$ 7.81), respectively, losing R$ 34 billion (U$ 6.63 billion) in market value compared to the previous day, reaching R$ 509 billion (U$ 99.27 billion). This loss of value is equivalent to the market value of Hapvida, according to Elos Ayta Consultoria. Year-to-date, the preferred share has appreciated by 10.58% and the common share by 9.72%.

Despite recognizing the increase in volatility in the state-owned company’s share price, analysts consulted by Capital Aberto maintain a buy recommendation for Petrobras, believing the company will not make drastic moves on any sensitive business topics.

In a report, BTG emphasized that it continues to believe the company will pursue new mergers and acquisitions and adopt strategies to reduce fuel price volatility. “However, we have little evidence so far suggesting that these measures will threaten double-digit dividends in 2024 and 2025.”

On the other hand, Guide explains that likely changes in the state-owned company’s strategy will be key to a recommendation change or not. Regarding dividends, much discussed and awaited by investors, Haag does not believe in further extraordinary dividend distributions, nor should the strategic plan include more investments, and the fuel pricing policy should be maintained.

“Petrobras shares should have a strong negative reaction and continue with high volatility in the coming days,” Haag concludes.


Real Estate Credit Funds (FIIs de CRI) gains extra with lower Selic rate drop and persistent inflation

May 15, 2024

In the first four months of the year, real estate investment funds (FIIs) saw significant share appreciation and record highs on the B3. The IFIX (B3’s FII index) rose by 2.12% by April, supported in part by monetary easing. Historically, there is a negative correlation between real estate fund pricing and the basic interest rate. A lower Selic rate could theoretically make FIIs de CRI less attractive compared to FIIs de tijolo (brick-and-mortar funds linked to the real economy), but this has not been the case. The category has performed well so far and, according to analysts interviewed by Capital Aberto, is expected to benefit from the slower pace of Selic cuts and projected inflation risks for 2025.

Maria Fernanda Violatti, a real estate fund analyst at XP, notes that the intense changes in the global macro scenario have led to significant re-evaluations in the FII universe. “Issues related to U.S. monetary policy, internal fiscal issues, among other factors, led economists to revise the base scenario. At XP, the base scenario for the Selic rate cut cycle in 2024 and 2025 was adjusted, with the rate expected to be 10% by December,” says Maria Fernanda. “This projection of a higher interest rate and non-converging inflation, especially in services, requires greater caution. NTN-Bs (public titles) have risen again and reached a high level compared to recent months, with the rate widening.”

Maria Fernanda recalls that in 2023, with the prospect of interest rate cuts, brick-and-mortar funds attracted investors, compressing the returns of FIIs de CRI. “With the scenario revision, we began to notice that FIIs de CRI were largely discounted relative to their net asset values, given the more favorable scenario for brick-and-mortar funds, a flow truly moving to this other class. Now, with the scenario change, receivables funds have impacted more positively within the IFIX index,” says Maria Fernanda. By April, CRI funds accounted for an average of 2.17% of the IFIX’s rise, while brick-and-mortar funds accounted for about 0.84% year-to-date. “We still have a constructive view, the interest rate is at a high level, the class will continue to benefit from robust dividends, and some CRI funds are being traded at discounts relative to their net asset value.”

Daniel Marinelli, BTG Pactual’s Executive Director of Real Estate, shares a similar view on the product’s attractiveness in the current scenario. “In 2024, credit receivables funds recorded a total return (dividend plus share appreciation) of around 3% to 3.5%, on average, standing out within the industry. In April, brick-and-mortar FIIs fell, amplifying the gain of CRI funds. Interest rates remain high, and we have controlled inflation around 4%, which results in good dividends,” explains Marinelli. “In this uncertain scenario, with the Selic rate maintained in double digits, funds more exposed to post-fixed rates (CDI) will continue to be a good income vehicle. For FIIs with inflation-linked CRIs, the outlook is less positive due to the market-to-market effect of the high real interest rate curve,” he analyzes, noting that “despite the negative market-to-market effect, inflation-linked funds are paying around 11% to 12% per year, higher than the 8% to 9% paid by brick-and-mortar funds.”

In the paper FII industry, there are funds composed primarily or entirely of CRIs indexed by IPCA (IPCA+) and others indexed by CDI (CDI+). Some funds may have both types and can actively manage their portfolios based on the manager’s strategy.

In the secondary market for indexed (or post-fixed) securities, prices are usually adjusted to expectations, causing those with a less favorable outlook to be traded at a discount, while others trade at par or with a premium.

“The same applies to paper FIIs on the stock exchange. Currently, CDI/Interest FIIs are trading at a premium relative to their net asset value, while Inflation/Price FIIs are trading at a discount,” says Daniel de Mattos, Inter Asset’s Director of Real Estate Investments. “It’s worth noting that the net asset values themselves reflect the pricing difference of their securities. In practice, CDI FII shares are approximately 7% above their IPCA peers, while the net asset value difference is approximately 2.5% to 4%.”

Regarding the broader outlook, Mattos indicates that while CRI FIIs are likely to remain less volatile and maintain their dividend distribution levels, IPCA FIIs could generate capital gains in the medium term, despite a possible reduction in dividend distribution in the coming months.

With a stronger dollar ahead and Brazil’s fiscal deterioration in recent days, interest rate curves are widening, the stock market is falling, and the latest meeting of the Monetary Policy Committee (Copom) with unanchored expectations increases the risk of higher inflation in the medium term.

With inflation effectively gaining strength again, buying IPCA FIIs, which will be re-priced in the future, could provide capital gains.

According to Mattos, the CDI versus IPCA comparison is similar to CRI and brick-and-mortar FIIs, where brick-and-mortar represents IPCA and CRI FIIs resemble CDI more closely.

“Brick-and-mortar contracts have a lag, being corrected annually for inflation. They take a few months to reflect inflation. Whenever inflation spikes, CRI and IPCA FIIs start paying higher dividends after three to four months because the contract is adjusted monthly,” Mattos points out.

Regarding FII allocation, Inter Asset’s portfolio is conservative. “Currently, the most defensive position is in CDI in the short term. In the long term, if you believe in the scenario, it will remain high or have to rise. You gain on both ends, in inflation and CDI.”

Meanwhile, BTG’s monitored FII portfolio is mostly tied to IPCA – the index that adjusts the portfolio’s CRIs. Of the 19 funds analyzed, most have a composition with IPCA-adjusted CRIs and others with CDI. Only two are nearly pure, KNCR11 with 99% tied to CDI and KNIP11 with 100% IPCA-adjusted securities. Both are managed by Kinea. “We need to follow the Central Bank’s steps; if you have high interest rates and tremendous currency depreciation with the dollar at around R$5.20, this reverberates within the inflation coupon, possibly having a negative impact here. Therefore, these rates may not fall as much as we initially expected this year,” adds Marinelli.

According to Flávio Pires, FII analyst at Santander Corretora, high CDI will ensure good dividends for shareholders. “In some way, paper funds are benefiting from high double-digit interest rates. The market should revise its projections in the coming weeks.” Regarding the risk of CRI defaults, as occurred in 2023 with some FIIs, Pires states that most market funds do have healthy CRI portfolios, “They have significant creditworthy debtors and guarantees. In the worst-case scenario, if the debtor cannot pay, the guarantee is executed, and the invested resources are recovered.”


Reasons for LWSA’s failure on the stock market

May 9, 2024

LWSA, formerly Locaweb, is one of the companies with the biggest drop in the Ibovespa in recent months, impacted by a challenging macro scenario amid uncertainties about interest rates globally, which directly affects e-commerce in Brazil, thus reflecting in the deceleration of the company’s revenue and growth rate.

On the other hand, Totvs, which shares cloud solutions for companies and software for management with LWSA, has been operating with better performance, and the outlook is more optimistic, according to analysts consulted by Capital Aberto.

In the last 12 months, LWSA has fallen almost 12%, while Totvs has risen 6.5%, according to data compiled by TradeMap. Year-to-date until May 7th, LWSA has dropped 17.97% and Totvs 17.25%. In the view of XP analyst Bernardo Guttmann, LWSA was seen as a “growth case,” but with this change and the revenue deceleration, it underwent a strong repricing.

Initially, experts expected the company’s fourth-quarter of 2023 to bring a turning point in the results, which did not happen. According to Fábio Louzada, financial planner and founder of Eu me Banco, LWSA has experienced significant declines in the year-to-date. “One of the main reasons is the high interest rate. The company is strongly correlated with interest rates, as are other technology sector companies. In Brazil, we have had a high interest rate above two digits for over two years.”

According to the XP analyst, LWSA’s stock is highly concentrated in the hands of foreign investors, seen as a “Brazil technology proxy,” hence it has a strong correlation with some technology ETFs listed on Nasdaq.

“This recent stress in the yield curve, in the face of expectations of a slower Fed at the beginning of the rate-cut cycle, ended up reflecting on this poor stock performance,” Guttmann emphasizes. In addition to this, Louzada points out uncertainties with Brazil’s fiscal situation and the change in the primary surplus target for 2025 and 2026 announced by the Ministry of Planning and Budget.

These doubts about the global scenario, which strongly impact LWSA, led Bank of America (BofA) to recently reduce the target price of the common share from R$ 7.50 (US$ 1.45) to R$ 6 (US$ 1.16), while BTG Pactual removed the stock from its small-cap portfolio. “This also contributes to investors’ pessimism about the stock, who end up preferring to position themselves in other more resilient sectors,” says Louzada.

If LWSA’s past and present were challenging, the future prospects are not encouraging. The BTG Pactual report on the expectation for the first quarter results of this year, to be released on Thursday (9) after the market close, points to disappointing growth, partially explained by a change in Squid, LWSA’s influencer marketing platform.

“We expect weak Locaweb growth in the first quarter, partially explained by a change in how Squid operates. The contract model was structured so that the contractor pays the full campaign amount to Squid, and then Squid pays the influencers their commissions (counted in CPV). But Locaweb is changing the contracts so that the contractor starts paying the commissions directly to the influencers, paying Squid only the campaign amount net of commissions,” the bank explains.

On the other hand, despite recent stock declines, Totvs is seen as a resilient company, being a very interesting financial technology case and a market leader.

Moreover, in contrast to LWSA, Totvs has cross-selling capabilities between its segments and a broad customer base, according to a Genial Investimentos report, demonstrating resilience through stable revenue flows, long-term contracts, and critical functionalities.

Recently, as a way to broaden its range, Totvs and LWSA clashed in 2021 for the acquisition of RD Station, a company with marketing automation tools. The battle was won by Totvs, which obtained a relevant stake in the company, boosting its Business Performance segment. Now, in an announcement made on Tuesday (7), Totvs said it now owns 100% of RD Station, acquiring the remaining shares.

RD Station’s platforms have been integrated into Totvs’s enterprise resource planning (ERP) software, creating a more comprehensive suite of business solutions.

For Genial, mergers and acquisitions have been a key lever for Totvs’s growth, allowing it to strengthen its core business, operate in specific segments, and increase cross-selling capacity. “Entering new markets, as evidenced by the acquisitions of RD Station and the joint venture with Itaú, demonstrates the continuous pursuit of growth opportunities,” the analysis says.

Levante Inside Corp analyst Matheus Nascimento notes that Totvs is supported by three ecosystems: management (ERP sales), techfin, and business performance. According to him, the most interesting point is that the company’s core business (management) has been growing at an attractive pace in recent years. “Along with this comes the business performance vertical, a line that is shaping up as a possible growth avenue, since when the company contracts management through Totvs’s ERPs, these business performance solutions end up bringing operational improvements to the clients.”

Another point in its favor is the detailed information level about customers. “Today, the business is mostly designed for the management segment. Business performance has been gaining representation in the balance sheet, although it has not yet reached the same size as the management business. And the third techfin vertical is also promising, as Itaú is behind it, providing all the financial structure for Totvs’s clients,” Nascimento says.

Although there is a discussion about what the pace of Totvs’s growth should be in the coming years, the Levante analyst emphasizes that Totvs is expected to remain a market leader. “Our outlook for the company is very constructive.”


How the football industry is capitalizing towards the stock exchange

May 7, 2024

The football industry has been increasingly investing in capitalization mechanisms, in addition to the creation of Football Anonymous Societies (SAFs). It has been betting on tokens with solidarity mechanisms and even FIDCs (Credit Rights Investment Funds) derived from image rights contracts of the club’s athletes to increase capital and deal with the high level of club indebtedness. The question is whether the next step is towards going public on the stock exchange.

The recent buzz created by the announcement of the sale of Cruzeiro by Ronaldo Fenômeno brings to light the movements of the football industry to escape from the long history of debts. The FIDC Zorro, which includes credit rights arising from contracts related to the image rights of the club’s athletes, linked to Cruzeiro itself and starting operations in February 2024, highlights a greater connection between the transfer market and the capital market.

The turning point in this relationship occurred indeed in 2021, with the creation of Law No. 14,193/21, which established SAFs. Shortly thereafter, the Brazilian Securities and Exchange Commission (CVM) published Guidance Opinion CVM 41/2023, addressing the applicable rules for SAFs wishing to access the capital market. At the time, CVM’s own president, João Pedro Nascimento, stated that the SAF Law had the potential to boost the advancement of the capital market in Brazil.

Felipe Crisafulli, a lawyer specialized in Sports Law at Ambiel Advogados, points out that Brazilian clubs have historical and long-standing debts and that SAFs are not the only solution, but undoubtedly were conceived to contribute to an improvement, “as they bring governance norms, oversight, best practices, and protection of shareholder rights into their concerns.”

Marcelo Godke, partner at Godke Advogados and specialist in Corporate Law, states that having a publicly traded company focused on the football market has given a significant boost to professionalization and now opens doors to access the capital market. “This does not mean that clubs will go public overnight, but they will first professionalize, create adequate governance structures, because a company without proper governance structure faces difficulty in raising money in the capital market, and then they will access financing through the market.”

The need for restructuring and new sources of funding for these teams responds to a long history of debts. In 2023, according to a survey by Sports Value, the sum of debts of the top 20 revenue-generating clubs in the country (of which 7 are SAFs) was R$ 8.9 billion (US$ 1.76 billion), a reduction of 21% compared to 2022. The leader in the ranking is Atlético Mineiro, an SAF that accumulates debts of R$ 1.4 billion (US$ 0.28 billion), followed by Palmeiras with R$ 942.6 million (US$ 186.07 billion), and Internacional with R$ 899 million (US$ 177.46 billion).

Meanwhile, the total revenue of these clubs reached R$ 9 billion (US$ 1.78 billion), the highest joint revenue in history, a 20% increase compared to 2022. TV rights, player transfers, and marketing revenues accounted for the majority, over 70% of the total.

The results explain the optimistic outlook for products such as football-related FIDCs, specifically image rights, which accounted for R$ 3.2 billion (US$ 0.63 billion) of the total club revenues in 2023. The initiative, led by São Paulo Futebol Clube in 2019, is promising, according to João Baptista Peixoto Neto, CEO of Ouro Preto Investimentos, manager of São Paulo’s FIDC, a fund guaranteed by the pay-per-view contract with TV Globo and due in March 2023.

“Various products can be used by clubs, such as issuing securities by the SAF itself, but the FIDC is one of the best to be used by any football club, even for those that have not become SAFs, to anticipate their revenues: both revenues from broadcasting rights for open TV, pay TV or Pay Per View, as well as any other types of revenues: ticket sales, advertising revenues, and membership fees or to anticipate amounts to be received from player sales.”

According to Peixoto Neto, the FIDC is excellent because it can be used by the club at any stage and to anticipate any type of revenue. He points out that, for the manager, it is beneficial because they receive fees for structuring, managing the FIDC, and distributing quotas to the investor. For the investor, it is a good investment that can provide higher returns with low risk, while the club can raise funds at a lower cost.

São Paulo’s FIDC aimed for a raising of R$ 37 million (US$ 7.30 billion), offering a return of 160% of the CDI. The estimated raising was R$ 40 million (US$ 7.90 billion).

Cruzeiro’s SAF followed the trend of this type of investment only in 2024, with the creation of the FIDC Zorro. The fund issued junior subordinate quotas of a single series and raised R$ 3 million (US$ 0.59 billion) in February. Contacted by Capital Aberto, Hemera and Monetiza, the administrator and manager of Zorro, could not comment due to the club’s ongoing change of ownership.

But FIDCs are not the only way to capitalize. Cruzeiro itself uses tokens based on the Solidarity Mechanism, which financially compensates clubs that train athletes, to raise funds from fans. Other teams like Vasco (SAF), Coritiba (SAF), and Santos are also supporters of the initiative. The product has already yielded good results to its holders. The tokens traded on the Bitcoin Market, Vasco token and Token da Vila (from Santos FC), have already distributed R$ 3.59 million (US$ 710 thousand) and R$ 10.85 million (US$ 2.14 million), respectively, in earnings until May 2024. While Cruzeiro token, from Liqi, distributed about R$ 1 million (US$ 200 thousand) and Coritiba R$ 468 thousand (US$ 92.38 thousand). The products are now traded on the secondary market.

Given so many changes and the increasing capitalization of these teams, investors are awaiting movements regarding going public on the Stock Exchange, a common practice abroad.

According to Godke, there is much study happening for this to occur. “Some clubs are being transformed, some have already been subject to sale, as recently happened with Cruzeiro. But it’s all a matter of time. So, if this happened in other markets, why wouldn’t it happen here?” asks the lawyer. “The market will only accept financing these companies once there is an adequate structure. A team that needs money, for them to go to the capital market, they will have to professionalize 100%, the management, etc.”

Crisafulli also mentions that this is a natural step after the initial moment of SAF formation, and now it is time to take further steps forward.

“The first of them was Ronaldo’s, with the resale of Cruzeiro SAF. The next one, perhaps, will be the IPO, with the club’s shares being traded on the stock exchange,” he points out. “But this is just one possibility, among many others, such as issuing future bonds, launching crowdfunding to raise funds, establishing investment funds, securitizations.”

However, for the sports expert, there are still some steps to be taken, including greater consolidation of legislation and maturity of the market as a whole.


Magalu, Casas Bahia, and Americanas: loss of market value and a model in question

May 6, 2024

Inefficiency in management and competition from companies like Amazon, Mercado Livre, Shopee, among others, have brought into question the business model of Magazine Luiza, Americanas, and Casas Bahia. These retailers experienced a brief respite during the pandemic when there was an increase in product consumption, but the movement did not withstand the rise in interest rates to contain inflation, and the punishment followed swiftly.

From 2019, pre-pandemic, until April 30th of the current year, Americanas’ shares depreciated by 98.61%, while Casas Bahia’s fell by 93.76% and Magazine Luiza’s dropped by almost 76%, according to a survey by TradeMap. Among the reasons explaining this decline, in addition to the rise in interest rates, is the management model of the companies and the difficulty in reinventing themselves between physical and digital sales.

In the case of Americanas, not only was the business structure a problem, especially in the post-pandemic period, but also the fiscal deficit of over R$ 20 billion (US$ 3.95 billion) that came to light in early 2023, leading the company to file for judicial recovery. Casas Bahia, on the other hand, perhaps suffers the most with its business model, as it failed to integrate into a “new market,” in addition to wrong choices and investments made by administrations over the years, which ended up putting the company in a precarious position.

On the other hand, Magazine Luiza, which apparently has a better governance level than its competitors, is doing well, although the Trajano family, the company’s controller, recently injected R$ 1 billion (US$ 200 million) in capital so that the company can invest in technology.

Given this scenario, experts consulted by Capital Aberto believe that Magazine Luiza is likely to fare better than its competitors in the coming years, although they acknowledge that a much more diversified market should be a cause for attention and concern for all retailers.

“Companies will have to strongly focus on omnichannel strategies (channel integration), not that they don’t already, but they have to leverage all the physical costs with the opportunities that digital brings, such as audience, to monitor and better understand the customer,” says Fernando Moulin, partner at Sponsorb, professor, and specialist in business, digital transformation, and customer experience.

In general, Moulin explains that retailers have their structural aspects mapped out, with no major changes to be made. “What needs to be done now are changes in business positioning, the most sold categories, closing some inefficient stores, rethinking commercial practices, etc.”

According to him, companies must manage well to overcome the challenges of high interest rates, consumers with less income, more hostile and global competition, allowing one or two of these retailers to survive in the long term.

On the other hand, Rodrigo Rocha, a Ph.D. in intellectual property science, undergraduate and postgraduate professor at Universidade Tiradentes, explains that digital transformation must be truly complete for technologies to really make sense for the company itself, for consumers, and for all parties involved in pre-sale, sale, and after-sale processes.

Another factor to consider, in Rocha’s view, is what we call “Cost Brazil,” which is nothing more than the structural, bureaucratic, labor, and economic difficulties that hinder the country’s growth. “[This] is a major challenge for national companies, considering that it compromises the competitiveness of local businesses, requiring even more attention to the innovative issues presented earlier to mitigate all these challenges.”

In the last 10 years, there has been a major change in Brazilian retail. The business model focused on physical stores has been left behind, with retailers being “forced” to focus on digital and marketplace, especially after the pandemic, when consumers were forced to stay at home.

According to VG Research analyst Lucas Lima, the advantage of a retailer focusing on the marketplace is the number of people accessing the platform, generating customer retention, profitability, and increased sales. “Magazine Luiza uses the marketplace to offer its logistical and financial services to sellers, which also greatly helps profitability.”

Just to give an idea of how important this segment has become within the retailers’ balance sheets, the Trajano family’s company reported R$18 billion (US$ 3.55 billion) in marketplace sales in 2023, surpassing physical store sales for the first time, which recorded R$17 billion (US$ 3.36 billion).

Although the marketplace is an excellent way to increase sales, the VG Research analyst doesn’t see room for everyone. “We believe that the big winner of the marketplace in Brazil is Mercado Livre, leaving little space for other companies to achieve the same success.”

However, Lima acknowledges that Magazine Luiza has been investing in the marketplace, capable, in fact, of riding this wave. “We cannot say the same for Casas Bahia, which took quite some time to find a more viable and sustainable business model. With a deep restructuring underway and a higher level of indebtedness, the company lags behind its competition and is likely to continue suffering due to the competitive environment,” he says.

Americanas, on the other hand, is still in the process of restructuring after last year’s events, and it will only be possible to better understand its level of competitiveness in the future in a few months, according to Moulin.

On the other hand, the Sponsorb partner recognizes the importance of the marketplace today for retailers, but he points out that in this segment, there is a different income composition nature than physical because there is a commission from platform resellers, logistics costs, advertising space to promote the reseller and financial products. “All of this is charged within the marketplace and constitutes revenue to cover operating costs.”

Regarding the recovery of retail sector stocks, the VG Research analyst states that the initiative is entirely linked to a relief in the interest rate curve. For him, if expectations for a reduction in interest rates improve in the coming weeks, there is room for some appreciation of these companies, as they are quite battered.

“However, we believe that a more significant recovery should be expected for the end of the year and the beginning of 2025. Despite the expected reduction (in interest rates), the average rate for 2024 should remain very high. The durable goods sector has a very high correlation with the Selic rate, as they are high-ticket items that consumers generally pay in installments.”


Governance in Sabesp’s after-sales and follow-on model raise questions in the market

May 1, 2024

The privatization of Sabesp, or “desestatização” as the São Paulo government prefers, will be carried out later this year. The certainty proclaimed by all is supported by two facts. First, the political environment favoring the sale, already with the approval of Bill 1,501/23 by state deputies, which authorizes the public offering of shares by the state government. The other factor is the high interest of investors in buying a stake in a company that made a profit of R$ 3.523 billion (US$ 0.69 billion) (in 2023) and has a revenue of around R$ 25 billion (US$ 4.93 billion). Besides the certainty of being sold, doubts remain about the sales model, whether it preserves the state’s interest, and about the company’s governance post-sale to ensure a balance of power between the State and the reference shareholder, safeguarding the rights of minority shareholders and avoiding litigation, as in the last major privatization, that of Eletrobras.

Capital Aberto reached out to privatization and governance experts and individuals close to the negotiations to understand the risks within the proposal already disclosed by the São Paulo government, which holds 50.3% of the company’s shares, for the privatization. Sabesp, considered the best water and sanitation company in the country, has 39% of its shares trading on B3 and 10.7% on the New York Stock Exchange. Additionally, it is part of the highest level of governance on the exchange, the Novo Mercado. With the entry of a strategic partner, it will have to amend its bylaws, share power, which imposes a series of precautions to preserve good governance and the rights of minority shareholders. However, even before that, the sales model of the company itself is being questioned.

From what is known about Sabesp’s sales proposal, the offer of shares in the search for a strategic or reference shareholder will be made in two stages. In the first phase of the share offering, interested companies will state the price per share they are willing to pay to become reference shareholders. The two best proposals move on to stage two when two “bookbuildings” are conducted, a process in which market investors indicate the quantity of shares they wish to acquire, akin to a pre-reservation of shares for those shareholders who passed the first stage.

“In theory, from what is already known, the shareholder who has the highest demand in their bookbuilding wins, but what if this is the lower price offered in the first stage? I imagine the government will find a solution for the possibility of selling at the lower price,” questions Gustavo Secaf Rebello, a partner in the Capital Markets area of the Machado Meyer law firm. “There could be a victory of the book with a lower price and more supply (demand), or conversely, the one with the highest demand for shares, a better price, but without so much demand. It’s not clear.”

Michel Frankfurt, head of the stock brokerage at Scotiabank Brazil, shares the same concern. “In the first stage, everyone makes the offer and the highest bids move forward, and from there it’s not very clear. It’s an innovative model in the search for a strategic investor. We need to understand better how the offering will take place in the second stage for the next investors,” comments Frankfurt, adding that the definition of the requirements for participating in the first stage is relevant. “There is the possibility that the cheapest proposal wins because it has a higher volume of demand. This criterion of stage two needs to be better clarified to know what will actually be considered.”

Another point proposed by the state government for Sabesp’s sale limits the shareholder’s vote to 30% of the shares, meaning that even if the reference shareholder eventually acquires shares and reaches 35% or 40% of the shares, their vote will be equivalent to up to 30%. “This is quite common; in several privatized state-owned companies, there is some limit on voting. It’s not new,” says Rebello of Machado Meyer.

The head of Scotiabank Brazil, while acknowledging that this type of clause is common, points out that there is always the possibility of some litigation, citing Eletrobras where the federal government questions the voting limit imposed on it at the time of the sale of the state-owned company. “To prevent the shareholder from exceeding the limit, the government proposes a poison pill that limits voting and makes the acquisition of new shares after the offering more expensive. This reduces risks, but does not eliminate them,” analyzes Frankfurt. “All of this needs to be very well tied up to avoid future disputes between partners and legal battles.”

Regarding the right to veto – golden share – under the known proposal, analysts consider it reasonable. The veto clause would be restricted to certain points such as a change of name, the corporate purpose, termination of activities, etc. “Companies like Embraer, IRB, and Vale have golden shares in their bylaws without major problems, as long as the limits are well defined.”

The São Paulo government also proposes that in Sabesp’s new post-sale bylaws, the Board of Directors be reduced from 11 to 9 members. The board will consist of three independent members, three from the state government, and three appointed by the reference investor. The election will take place through slates.

The partner at Machado Meyer questions the appointment model that does not correlate with the number of shares. “This part is really curious because if I’m going to have a partnership that, after the operation, will no longer have a controlling shareholder, it doesn’t make sense for the government to have a number of seats that allows it to have greater influence in some way,” says Rebello. “And these 30% of the government will be forever, even if it has fewer shares,” he emphasizes. The São Paulo government’s proposal is to retain around 20% of Sabesp’s shares.

Frankfurt highlights another important point about post-sale, which are the limits that need to be clear in the contract regarding conflicts of interest in participating in new concessions. “If there is any competition in the area in another state and the reference shareholder is to participate, they can do so without involving Sabesp, or does the company have any preference, this is important,” he explains. “Today, it is under the state’s control, it is a mixed economy company, but when sold, it needs to meet the investors’ interests.”

Concern about governance in a new post-sale reality is also mentioned by Cristiana Pereira, a partner at ACE Governance. “Sabesp is in the Novo Mercado and has always had a high level of governance, but it’s another reality, and the bylaws have to be very clear to avoid conflicts among shareholders and ensure everyone’s rights,” comments the specialist. “We have to think about how the board is, how the board relates to management, what the bylaws clauses are, rights, but you have to think about how this mediation will take place mainly.” Cristiana asserts, recalling other privatizations, that the challenge of balancing public and private interests is always significant, especially in essential services such as sanitation. “It’s normal for the government, the regulator, to want to establish some limits. It’s not a service that can fall into anyone’s hands. We need to ensure that this investor, who will have a relevant stake, has the conditions to exchange that company.


Major banks lose market value and balances should provide clues about improvement

Apr 30, 2024

Banks Santander and Bradesco, when compared to direct competitors such as Itaú Unibanco and Banco do Brasil (BB), for example, have not been performing as well as their peers in terms of market value. A survey conducted before the last quarter’s balances of last year showed that on January 22nd, Santander’s market value was R$ 110.97 billion (US$ 21.39 billion), falling to R$ 99.15 billion (US$ 19.11 billion) on April 22nd. Bradesco, on the other hand, went from R$ 158.53 billion (US$ 30.56 billion) to R$ 136.26 billion (US$ 26.27 billion) in the same period. Both institutions suffered from the repercussions of their balances from the last quarter of 2023, disclosed on January 31st and February 7th, respectively.

Despite the numbers, analysts believe that the results of the first quarter balances this year may show investors a recovery, albeit slow, resulting in a better pricing for the financial institutions’ stocks. Santander, in fact, kicks off the big banks’ earnings season, presenting its results this Tuesday (30).

The performance of banks on the stock exchange is quite heterogeneous even when analyzed over a longer period of time. While the market value of Itaú Unibanco and Nubank skyrocketed and that of BTG and Banco do Brasil had a discreet improvement from 2023 to 2024, Bradesco and Santander remained distant from the same growth curve. Itaú Unibanco’s market value went from R$ 229 billion (US$ 44.15 billion) on April 26, 2023, to R$ 295.2 billion (US$ 56.91 billion) on April 26, 2024, while Nubank went from R$ 114.6 billion (US$ 22.09 billion) to R$ 266.9 billion (US$ 51.45 billion) in the same period. Bradesco and Santander, on the other hand, remained practically stagnant, going from R$ 136.2 billion (US$ 26.26 billion) to R$ 138.7 billion (US$ 26.74 billion), and from R$ 97.5 billion (US$ 18.80 billion) to R$ 102 billion (US$ 19.66 billion), respectively.

The drop in the valuation of the two institutions in the last quarters reflects the latest published balances. “As they reported results well below market expectations, the shares were penalized, as well as the market value of these institutions. Such movement is a reflection of the impact of delinquency that deteriorated the balances, demanding a higher level of provisions,” says Matheus Nascimento, bank analyst at Levante Inside Corp.

The reason for the decline is primarily due to mismatches in credit concession models and because their portfolios are heavily exposed to riskier segments such as Individuals and SMEs, according to Milton Rabelo, analyst at VG Research.

According to Victor Martins, senior analyst at Planner Investimentos, the performance of bank stocks this year correlates more with reported results combined with the guidance disclosed for 2024 and with the perspective of a more restrained Brazilian economic activity. “In the case of Bradesco and Santander, the two banks registered a greater reduction in market value this year. Bradesco, which is undergoing a restructuring process, reported recurring net income of R$ 2.9 billion (US$ 0.56 billion) in 4Q23 (ROAE of 6.9%), mainly explained by an increase in credit costs and operating expenses,” says Martins. “Santander (Brazil) reported in 4Q23 recurring net income of R$ 2.2 billion (US$ 0.42 billion) (ROAE of 12.3%), a result below expectations and the potential of the bank and which, in our opinion, guided the behavior of the shares. However, the trend is for improvement, resulting in a better pricing for the stocks.”

According to Nascimento, from Levante, Santander’s numbers in this 1st quarter can be seen in a slightly less negative way, with the bank showing an increasing level of profitability, or in line with what the consensus has projected, and should be used to understand if the changes that were announced in the past quarters are already beginning to reflect in the balances, which should favor the company’s pricing.

The outlook for Santander is much more positive than Bradesco, for example. “Bradesco is still going through a very challenging moment. We should look at whether the structural changes announced in the last quarter are indeed beginning to be made. That should be the tone of this result,” says Nascimento.

According to the analyst, if there is good news, with fundamentals, in other words, if it reports good profit, above market expectations, with levels of quality gains, Bradesco should indeed regain market value.

According to a report by Itaú BBA, by Pedro Leduc, Mateus Raffaelli, and William Barranjard, the outlook is positive for the financial sector.

“In the context of a broader market correction, this is likely to help investors gain confidence to capture solid growth stories with attractive valuations. We are reiterating our top picks Nu, BB, and BTG ahead of the season, predicting profit expansion with solid KPIs. Banks are where we are most optimistic.”

According to BBA, there is likely to be profit growth for large banks in the 1st quarter, mainly driven by lower credit provision expenses, as the worst NPLs have occurred in the past. Although acknowledging that higher rates have a negative effect on long-term growth prospects, equity flows, and valuations, the institution states that the short-term outlook for large banks is relatively positive.

Meanwhile, the Bank of America (BofA) report, produced by Mário Pierry, Flávio Yoshida, Antonio Ruette, and Ernesto Gabilondo, states that they are “comfortable with Itaú”, which is expected to present another quarter of steady improvement, while Santander will show signs of improvement and solid year-over-year net profit growth, the best in the sector, albeit from low levels. Bradesco is expected to continue in the right direction, but limited revenue growth, given the process of reducing the loan portfolio’s risk, and high expenses are likely to dampen market excitement. In Nubank, BofA sees negative risks for the estimated net profit of R$ 407 million (US$ 78.46 million), given the pressures from the growth strategy in Mexico.

“Itaú Unibanco is expected to present another quarter of steady improvement. We expect another set of solid results with net profit of R$ 9.7 billion (US$ 1.87 billion) (+15% year-on-year) yielding ROE of 21.2%. Credit portfolio growth should remain under pressure due to the more moderate performance of the individual portfolio, reflecting mainly the quarterly contraction in credit cards after a strong 23% growth in the 4th quarter,” says BofA.

Regarding Nubank, BofA expects GAAP net profit of R$ 407 million (US$ 78.46  million) (24.7% ROE), better than the R$ 361 million (US$ 69.59 million) in the 4th quarter, despite negative seasonality at the beginning of the year, but sees risks from the growth strategy in Mexico.

For Santander, BofA experts expect strong net profit growth, up 30% quarterly (explained by weak comparisons), improving ROE to 13.3% and confirming BofA’s view that the results are heading in the right direction, with the market NII and provisions normalizing.

Meanwhile, Bradesco is expected to continue in the right direction, but limited revenue growth, given the process of reducing the loan portfolio’s risk, and high expenses are likely to dampen market excitement, according to BofA’s report.

Rabelo, from VG, believes that Bradesco and Santander are likely to have lukewarm results with slow and gradual evolution of results. “Neither of the two banks is expected to present a quick and vigorous recovery in the first quarter of the year. We do not expect a rapid repricing of shares for them.”

During 2024, according to a Fitch Ratings report, Brazilian banks will face continued headwinds in their revenues due to new interest rate cuts.

“The pace and magnitude of these cuts are still uncertain, but the short-term benefit to net margins will be balanced by lower-yielding loans and modest real credit growth. New Selic cuts should support better spreads in the short term, as floating rate funding largely reprices more quickly than fixed rate loans,” the report says.

Interest rate risk may, in turn, increase the market risks of classified banks, resulting in net financial margin volatility through repricing of credit operations and principal raising.

For the year, according to Fitch, lower interest rates may help banks accelerate the growth of their loan portfolios and, consequently, revenues. However, this may increase delays if banks seek more profitability and credit. “Institutions are likely to focus on assets with higher collateral, such as real estate credit, with more limited growth in other assets with collateral (mainly consigned), due to the imposition of rate ceilings by the government.”

Nascimento, from Levante, points out that the qualitative aspect of the 1st quarter balances will actually indicate which players have better conditions for the challenging scenario and that its definition is especially linked to the economic dynamics in the USA, with expectations of interest rate cuts being postponed to the second half, or even to 2025.

According to Fitch, the appointment of a new BC president at the end of the year may also influence monetary policy. However, this will depend on inflation and the country’s fiscal dynamics.


Multimarket fund managers see light at the end of the tunnel

Apr 29, 2024

The life of fund managers, which has never been easy, became even more complex after the pandemic, even for those who are experts in the capital market. This is because the global economy became harder to read, with interest rates and inflation making prices and costs more expensive. With the murky scenario, in which fixed income began to outperform, and by a large margin, variable income, managers have been maneuvering in recent months to try to mitigate losses in multimarket funds.

To give you an idea, this type of investment saw withdrawals of almost R$ 170 billion (US$ 33.28 billion) in the last 12 months up to March of this year. In 2024, up to last month, withdrawals total just over R$ 28 billion (US$ 5.48 billion), according to data from the Brazilian Association of Financial and Capital Market Entities (Anbima).

In the same period last year, this number was significantly higher, which shows the difficulty of that scenario and the skill of managers in reducing losses, especially since the interest rate in Brazil was at 13.75% per year, while in the United States the Federal Reserve continued to raise the rate.

Last year, the accumulated value for the same period, up to March, totaled R$ 37.4 billion (US$ 7.32 billion), a 32.14% increase compared to the same period this year.

In addition to the challenging global environment, which increased risk aversion, Anbima’s vice president, Pedro Rudge, says that the taxation of closed-end funds may also explain part of the withdrawals in recent months. “Combining performance, high volatility, risk aversion, all of this led investors to seek more conservative instruments. Now, however, with the expectation of falling interest rates consolidating, the attractiveness of more risk increases.”

Overall, despite multimarket funds having suffered greatly in recent months, the macro category had a consistent result, according to the multimarket manager of AMW, the manager of Warren Investimentos, Eduardo Grübler.

Since the beginning of the year, macro multimarket funds have had an average return of 0.56%, while the CDI, the main benchmark of the category, has had a return of 2.9%. If we compare tax-exempt investments, the performance of multimarket funds becomes even less attractive.

According to Grübler, just because the class is doing poorly doesn’t mean all funds are doing poorly. He cites, for example, a multimarket fund from Warren that has performed very well over 12 months, running at 170% of the CDI. “This year, it’s at 203%, largely because it’s not betting on interest rates,” he says.

Although the global macroeconomic scenario is unfavorable, the interest rate cuts in Brazil should benefit multimarket funds, which has not been the case. According to Ricardo Martins, chief economist at Planner Investimentos, slower American disinflation and a calmer stance from the Fed in starting the rate-cutting cycle are the main causes.

“As the scenario becomes murky, turbulent, unpredictable, it is certain that returns will be more laborious given the multiple allocation opportunities and their relationship with ‘safe havens,’ such as fixed income or private credit,” Martins analyzes. “Thus, fundraising for these funds begins to compete with other fund profiles, with a great possibility of being negative, and allocation becomes much more cautious and complex, exposing even the greatest risk of less obvious markets that may not materialize.”

This example, in fact, can be seen in the IPCA+2045 Treasury rate over the last 12 months, which shows that the yield curve in vertices, which is how managers operate interest rates in portfolios, has not yielded at the same pace as our basic interest rate.

“Every now and then there’s IPCA + 6% per year for everyone. What’s the trend? It becomes difficult for managers. Lowering the Selic rate doesn’t help if long-term rates remain volatile like this,” analyzes the head of equities at Nippur Finance, Junior Reginatto.

Even with the perception that the worst may be behind us, as there is an expectation of interest rate cuts on the horizon, both here and in the US, some say that the global scenario could deteriorate and end up penalizing assets.

According to the chief economist at Planner, it is necessary to observe the scenario as a whole to make the diagnosis, although he believes that some asset classes may recover. “Everything will depend on the deterioration and penalization of the scenario. However, it may not be enough for a widespread recovery.”

On the other side of the current, there are those who believe that the worst is already over, with practically everything priced in, except for unexpected cases, such as wars, which have the power to turn the world upside down and change all expectations.

Grübler notes that the redemptions of multimarket funds have slowed down, with some asset managers even opening new funds of this type. “Whether it will turn into inflows is hard to say,” says the manager, adding that the time to enter the multimarket is now because things are clearer.

Recently, indeed, multimarket funds had this “threat” of recovery, as in mid-2023, but it did not materialize, precisely because of global upheavals.

For the head of equities at Nippur Finance, the main trigger for the recovery is abroad, since the interest rate cuts in other markets combined with the reduction of Selic here, can make a perfect combination.

In light of this, Reginatto warns that only those already positioned will be able to catch these abrupt movements. “The average investor, as usual, tends to arrive late. But it will come back, just as performance will also return. The good managers haven’t forgotten how to make money. However, this fight is tough even for those who are black belts in the market.”


Mergers and acquisitions in Brazil fall short of initial expectations

Apr 25, 2024

Since the pandemic, the movement of mergers and acquisitions (M&A) has drastically declined worldwide, including in Brazil. Moreover, the logic of markets seems to have shifted, as evidenced by the difficulty in controlling global inflation and the increase in production costs.

This market shift, combined with the unique characteristics of certain sectors of the economy, such as retail, for example, has led to the realization that achieving the much-touted synergy, often promised by companies during mergers and acquisitions, has been slow to materialize.

In Brazil, from February to April of this year, the market witnessed the announcement of major transactions, such as the merger of Grupo Soma with Arezzo or the potential business combination between Azul and Gol. In the former case, there is difficulty in convincing the market of the synergies, as both companies lost market value.

From January 10 to April 19, Arezzo’s market value dropped from R$ 7.1 billion (US$ 1.27 billion) to R$ 5.7 billion (US$ 1.10 billion), while Grupo Soma’s fell from R$ 6.4 billion (US$ 1.24 billion) to R$ 4.8 billion (US$ 0.93 billion).

According to Paola Mello, partner at GTI and investment analyst, these operations usually cause market euphoria, but executing the process of combining two companies is very difficult. “In practice, we do not observe this generation of value that is always initially mapped out. Cases that actually generate synergies are very rare. I think there are few cases that I remember seeing significant synergies.”

In the case of retailers, one of the doubts is whether they have the capacity for integration, both operationally and financially, in addition to the debts of Grupo Soma, which acquired Hering in 2021.

“Sometimes, companies believe they will be able to do cross-selling of products, and these are the synergies that make me more skeptical, not only in the case of Soma, but in all,” says Paola, adding, “In the case of Arezzo and Soma, there are 34 high-income brands, with very demanding customers, with very specific production processes. There are synergies, but they are quite fragmented, not very obvious, they require a lot of execution to capture.”

On the other hand, Itaú BBA points to positive prospects for the business in the medium term. “We see significant potential to unlock value with the agreement in terms of synergies, but the potential for appreciation is so high at current prices that we don’t even need to consider synergies to see a P/E (price-earnings) of 11.3x for 2025.”

Given the apparent difficulty of companies, the partner at GTI and investment analyst warns that the initial market expectations may change if companies start showing results. “If they show any kind of cross-selling, even if small, the market will be excited. If they are agile in cutting sales costs or optimizing expenses, everything will depend on execution. If it is good, I tend to agree with Itaú’s estimates, which have upside.”

This is not the first time that an M&A operation has gone against the market’s initial impressions. Cases, both positive and negative, have been observed in the country for decades.

In this case, we have a major example of the merger between NotreDame and Hapvida in 2021, creating the largest health insurance company in Brazil, with more than 16 million beneficiaries.

For Paola, this was by far one of the cases that had the most euphoria at the beginning and disappointed a lot later. “Now it is starting to deliver results.”

Initially, calculations indicated that the combined company would be worth around R$ 100 billion (US$ 19.37 billion), however, this market value little over a year after the merger announcement was about R$ 37 billion (US$ 7.17 billion).

“The sector does not have increasing and better quality results over time. In reality, purchasing power has decreased and is decreasing, competitiveness has increased, so expectations are distant. Optimistic reasons that generate optimism in the market are sought, but does this materialize in the medium and long term?” says Oscar Malvessi, coordinator of the mergers and acquisitions course at FGV.

According to him, the estimates, values, and the economic synergy of the transaction are very optimistic at the beginning. “This makes the market begin to realize that the company is not delivering what it promised and what was possible to deliver, and the reaction is for the price to fall.”

Among the possible reasons for the disappointment is the cost synergy, which did not occur as expected, since the market expected cuts in duplicated areas.

“In practice, none of the synergies they announced happened, such as price increases, consolidation of national plans, even with two CEOs they stayed for a long time,” analyzes the partner at GTI and investment analyst.

In the line of M&A operations, whose initial “euphoria” overshadowed the real prospects for the business, there is the operation involving Pague Menos and Extrafarma in 2021. With the operation, Pague Menos became the second-largest company in the sector, behind only the Raia Drogasil group.

“Thirteen months of delay in approval and interest rates rose a lot in the period. When they announced the deal, the Selic rate was 3.4%, when the Cade (Administrative Council for Economic Defense) approved it (2022) it was 13.15%. With this, debt grew a lot and profit evaporated,” says Paola.

But the opposite, although rare, also happens. Raia Drogasil is a successful example in M&A operations. Announced in 2011, the purchase of Drogasil by Droga Raia generated the giant Raia Drogasil, leader in the pharmacy retail sector. The partner at GTI and investment analyst says the operation was successful, but points out that it was very slow. “It took about 2 years to adjust. They tried to maintain the best practices of each company, were very diligent about it. They did not impose the terms of the acquiring company, as usually happens. They got the best of both worlds,” he explains.

Malvessi points out that, together, the way of deciding, analyzing, and seeing the market made a difference in this case. “Analysis, decision-making, people training, technical updating, technology, everything you can imagine. One of the aspects that I usually mention is that, in addition to the numbers, you have the strategy.”

Data from 2021 from the Brazilian Institute of Corporate Governance (IBGC) show that 65% of acquisitions in Brazil fail to achieve the objectives established initially.

The coordinator of the mergers and acquisitions course at FGV believes that this data should remain. “I find it difficult to improve. If it has improved, it is one or another operation. We, in Brazil, are technically lagging behind, we use very simple concepts for management and analysis. This is a reason why the percentage is much higher in the country.”

Academic research indicates that, regardless of the country and region, in about 70% to 60% of M&A cases, the result is below expectations, according to the Counsel of the Corporate Relations & Corporate Governance practice at Tauil & Chequer Advogados, André Camargo.

“This is frustrating. This type of frustration happens, we always talk about it in the classroom.Two-thirds of the operations do not bring what they promise. This may be one of the points of frustration as well because everyone makes noise, is happy with the transaction, but it is another reason why we do not perceive this change in opinion about the quality of the result,” says Camargo.

Among the causes of this movement, Camargo mentions Due Diligence audits, when they do not capture the risks of the operation, the degree of optimism that the parties have regarding the business premises, and the integration of companies.

“When integrating operations, there will be problems of all kinds, technological, cultural, sometimes it takes a long time to get Cade approval. In other words, you planned that to be done in six months, but the business took two years and did not get out of that,” Camargo points out. “When measuring the result, we reach this number of 60%, 65%, 70%. The chance of an M&A operation being frustrating, not of going wrong, but of frustrating, is greater than the chance of everyone being happy.”


Caution puts venture capital resources on hold

Apr 24, 2024

The year 2023 was marked by a series of challenges for the global market as a whole, including for venture capital, both in Brazil and worldwide. What can be seen is that global inflation and geopolitical conflicts directly impacted the sector, which saw a reduction in the volume of investments and an increase in investor caution.

For instance, a report from KPMG shows that the volume of venture capital investments last year reached US$ 2.2 trillion worldwide, a 47% decrease on an annual basis. In the last quarter of 2023 alone, the volume of investments was 18% lower than the same period in 2022.

As expected, Brazil followed the global trend, with a drop of about 53% in the amount of investments in 2023 compared to the immediately preceding year, with the volume dropping from R$ 4.1 billion (US$ 820 million) in 2022 to R$ 2.1 billion (US$ 420 million) last year.

With this, the question arises as to whether financial resources for venture investment have ceased and why. According to experts consulted by Capital Aberto, there are several factors influencing the decline in venture capital investments worldwide, such as geopolitical tensions, interest rates, and disappointing performance of some startups.

“It’s a natural strategy adjustment, considering that in Latin America this type of investment grew dramatically during the pandemic years. The industry, in general, has become more selective in choosing assets, but the source is far from drying up. This greater selectivity is due to some factors, such as cases of large investments that did not bring the expected return, inflation, and increased interest rates in developed economies,” says João Busin, partner at TozziniFreire Advogados.

According to the CEO of Ouro Preto Investimentos, João Peixoto Neto, investments in any segment are always cyclical and reflect economic cycles to some extent. “Investment in venture capital is one of the riskiest investments and, therefore, more sensitive to these cyclical changes.”

He explains that the growth of investment in private equity, especially in venture capital, has always been a reflection of euphoria in times of significant economic growth and the introduction of new technologies that stimulate entrepreneurship. “The last good moment occurred in the years of economic recovery that followed the 2008 crisis,” Peixoto Neto says.

On the other hand, Victor Harano, head of research at Distrito, points out that, in addition to all the factors already mentioned, deficit operations of startups and high valuations have become more intolerable for investors, reducing the range of opportunities and decreasing investment activity.

Furthermore, he emphasizes that there was a significant bet on post-pandemic consumption behavior. “Some theses were not fully proven with the end of the pandemic, leading to a decrease in investor expectations and a change of course in many startups,” explains the head of research at Distrito.

With the decline in venture capital resources, the question arises as to whether the money is going into another type of investment. In general terms, the current economic scenario is directing resources toward more conservative investments.

In light of this, experts unanimously affirm that the main competitor at this moment is fixed income and private equity, an investment similar to venture capital but focused on mature companies with a history of profitability, offering lower risk and greater predictability of return. In 2023, for example, funds of this type recorded a 19% increase.

Despite this, Harano explains that investor caution is also reflected in the choice of sectors in which they invested. “Technology startups focused on health, retail, and financial markets, traditional sectors, were the ones that attracted the most investments.”

This greater selectivity in the industry has opened up space for another class of alternative assets, such as corporate venture capital, according to the partner at TozziniFreire Advogados. “Today, a co-investor not so desired by venture capital players plays an important role in executing new deals (mergers and acquisitions) on a resource scale.”

There is an expectation of a cautious recovery in the market, given the experience and maturity gained in recent years, especially as the Central Bank (BC) is expected to continue lowering interest rates. It is also important to note that, in recent months, investments have remained stable and some investment rounds have resumed in the sector.

“In the short term, we may see positive signs, such as new fund raisings and late-stage rounds happening again, but a robust recovery will still require more time to be achieved,” warns Harano.

Compared to 2023, the sector has shown a reasonable increase. Data from TTR Data, which provide information on M&A (mergers and acquisitions), venture capital, and capital markets, show that the volume of operations overall increased by 20%. “From what we have been following regarding the movements of our clients and partners, we are cautiously optimistic, expecting a better year,” emphasizes Busin.

Despite the decline in venture capital investments in 2023, there is a strong market expectation for an increase in this type of investment this year, mainly focused on solutions such as open banking, given the still high number of unbanked population, instant payment platforms, and implementation of artificial intelligence solutions in companies, according to Luís Carlos Beltrami, lecturer in the MBA course in corporate finance, auditing, and controlling at Universidade Tiradentes.

On the other hand, Peixoto Neto points out that the American economy has shown resilience to the increase in interest rates, and the government continues to increase public debt with huge fiscal deficits. Therefore, it is likely that we are still at the beginning and not the end of an economic crisis.

“Until this cycle completes, we will not see a strong recovery in venture capital growth. The opposite is quite likely, that such investment will continue to decline at this time,” analyzes the CEO of Ouro Preto Investimentos.”


Petrobras (PETR4) and Vale (VALE3): Are They Attractive? See What Analysts Say

Apr 19, 2024

Amidst market volatility in recent days, particularly after the Federal Reserve signaled that interest rates in the United States will remain high for longer, prospects for the global economy are anything but optimistic. Consequently, stock markets around the world and their assets are experiencing strong fluctuations.

Among these assets, Petrobras (PETR4) and Vale (VALE3) stand out, recognized as significant drivers for the Ibovespa, the main index of B3, both upwards and downwards. However, despite the challenging global scenario, the companies are not on the same side of the game.

In 2024, the preferred shares of the state-owned company rose almost 7%, while Vale lost nearly 16%, according to a survey by TradeMap. The Ibovespa, meanwhile, recorded a 7.46% decline for the year, considering the closing price up to April 17th.

As a result, Capital Aberto consulted analysts to determine how far the shares of these two giants could go. In both cases, the answers were unanimous: ‘it depends’. For Petrobras, there is a governance risk. In Vale’s case, it’s China, a major consumer of iron ore.

“Vale has a very attractive price, around R$ 62 (U$ 11.93), which implies a valuation price of R$ 300 billion (U$ 57.73), which we find very good. If iron ore remains at the level of US$ 100 to US$ 110 per ton, we will have Vale paying a 10% yield. It is a company that generates a lot of cash, with environmental problems practically resolved,” says Phil Soares, head of stock analysis at Órama Investimentos.

For him, despite the iron ore giant having a significant entry barrier, which is the asset itself, the company is highly favored, being one of the main recommendations. “Investors who entered the stock at R$ 60 (U$ 11.55) or R$ 65 (U$ 12.51) still have their principal widely protected, even with the substantial drop in the stock market,” explains Soares.

According to Pedro Marcatto, a variable income operator at B.Side Investimentos, the recovery of the iron ore price in China is in favor of Vale, due to the increased industrial activity of steel mills, which have had a high demand for steel, although the construction sector, the main driver of the Chinese economy, is struggling.

At Órama, the outlook for iron ore is reasonably good, with the commodity staying in the range between US$ 100 to US$ 120 per ton over the next few years, precisely because of China. “In Asian countries, we don’t see a strong acceleration of economic activity, nor do we see an increase in the construction sector, although it is possible. We also don’t see the price (of ore) falling much because of the social role of the steel industry activity in China, which is extremely relevant, and very demanding of steel,” says Soares.

Yesterday, the iron ore contract for September, currently the most traded in Dalian, China, closed up 3.07% at US$ 120.75 per ton. “What has weighed more is the destocking ahead of the pre-holiday in China, driven by increased demand from steel mills. The price of iron ore is the main driver for Vale, but it has been favored by industrial activity in China,” says Marcatto.

If the main driver for Vale is exclusively linked to the dynamics of the industry it operates in, Petrobras cannot say the same, as the state-owned company is always under the scrutiny of the government, its controlling entity.

For the head of stock analysis at Órama, the state-owned company would have everything to be taking off, since the price of oil is high, due to recent events in the Middle East, involving Iran, a major oil producer.

According to Soares, oil companies have shown some resilience on the stock market, with oil prices rising, which helps boost revenues. “Moreover, the rise in the dollar also allows for gains, since a significant portion of the companies’ costs are not dollar-denominated.”

In fundamental terms, in Marcatto’s view, the stock has multiple attractions and delivers significant margins, but the controller is the most concerning. “It has a very large risk premium, traded at a discount due to governance issues. Governance is more important than Brent, since the lifting cost (extraction cost) is low, around US$ 5.”

Despite the conflict in the Middle East being a major catalyst for oil prices, the variable income operator at B.Side Investimentos points out that the state-owned company cannot fully absorb this increase. “It (Petrobras) does not benefit from a significant rise in oil prices because it suffers from social pressure, due to fuel price adjustments. Its margin is very little favored because of this,” explains Marcatto.

In this scenario, Órama considers Enauta and Prio as the preferred choices in the sector on B3, each for a different type of investor. In the case of Prio, it is for investors who want to expose themselves to oil prices and have less risk appetite, as the company is very well priced. “Enauta, on the other hand, is for investors who are more willing to benefit from improvements within the company but with significant volatility,” Soares concludes.


COEs struggle in Brazil, but experts still see room for growth

Apr 17, 2024

Structured Operations Certificate (COEs), also known as the Brazilian version of “structured notes,” entered the Brazilian market in 2016 with high expectations but have yet to “take off.” Over the past four years, the trading volume has been increasing, which explains the assessment of some market participants who see potential for the product to gain traction. However, COEs have also been the target of many criticisms and complaints.

From December 2022 to December 2023, the total trading volume nearly doubled, from R$ 1.2 billion to R$ 2.1 billion, according to a survey conducted by Fipecafi with data from B3. By March 2024, the total volume of COEs reached R$ 2.56 billion, with an average volume per operation of R$ 129,116. The record amount reached by the product in May 2023 was R$ 3.09 billion.

“The instrument allows for both guaranteed capital (more common) or at risk (less common) modalities. In other words, in the worst-case scenario, the investor either exits with the same invested amount (if guaranteed) or faces the chance of losing value compared to the principal invested (if at risk),” says Felipe Nasciben, a Finance professor at Fipecafi and a specialist in the financial market.

Luciana Maia Campos Machado, a Finance professor at Fipecafi and author of the study on COEs over the past four years, points out a trend of growth in the industry, with a greater distribution of these products. However, the decrease in the average volume per operation over the years suggests greater investor access to products with a more affordable minimum investment.

For Itaú Unibanco, the decline in the average ticket size is positive as it allows for the exploration of other investor profiles and the popularization of the product.

“With a lower ticket, we can even access investors who now have access to products that they would have had difficulty investing in before. It’s one thing for a high-net-worth investor to invest directly in offshore markets or indices, or occasionally make compositions. When you go to a more retail investor, this access is a bit more difficult, although it is more democratized today,” says Marcio Kimura, superintendent of Itaú Corretora.

Currently, there are numerous COE options in the market, tied to indices, stocks, or commodities. Since the issuance of the first COE in Brazil, the industry has become more diversified and accessible.

Among the COE trends, Nasciben from Fipecafi observes an increase in products tied to international assets, especially from foreign banks with local units, emissions referenced in international assets, and trigger conditions for coupon payments and/or early termination of operations.

Itaú, one of the main issuers of the product, corroborates this information. “We have a significant portion of two main families of COE: one of fixed income, whose strategy is associated with inflation, usually IPCA, or the futures interest rate market, with a more conservative profile because they usually have a minimum income, at least a minimum guaranteed return.

“Historically, we have always had a significant portion of this type of product at Itaú,” says Luciano Diaferia, Itaú Unibanco’s Product superintendent. “The second important portion for us today is what we call international indices, which are linked to giving investors access to markets outside the country, for example, accessing the American stock exchange or the European stock exchange.”

In addition to foreign assets, there is a trend of COEs related to corporate debts and an increase in the at-risk capital modality. According to the Fipecafi specialist, the vast majority of COEs are still issued in the ‘protected capital’ modality, which guarantees the investor at least the invested amount back, but it is already possible to observe an increase in offerings available on brokerage platforms in the ‘at-risk capital’ modality, where there is the possibility of total or partial loss of invested capital. “It is an important change for the Brazilian market still with a relatively low level of financial education of the investor,” Nasciben points out.

For Itaú, the product has shown some expansion at a “considered adequate pace.” “The COE is meant to be an additional class among investment alternatives, it is a portion of the investor’s portfolio. It is not meant to be a product of the same size as the CDB in the market, for example,” says Diaferia.

According to Nasciben from Fipecafi, the possibility of diversification of exposure in a single instrument and the potential return above traditional fixed income, but with possible guarantees of no loss of principal, are positive factors, but he notes that, being a hybrid of fundraising plus a derivative, it brings with it the idea of opportunity cost plus the cost of entry into derivatives (like an option premium), two variables that are not commonly known and easily priced.

For the specialist, there are serious institutions in the market that offer correct products to investors with suitable profiles, who end up having good experiences with COE and, in many opportunities, good profitability. However, the industry has not ‘taken off’, especially because many investors did not see real returns, and this may have occurred due to different factors. “Such as the fact that the business ideas of the issuers were not successful in terms of market analysis accuracy, the rejection of some investors to invest in products they do not know, the eventual abuse of spreads that compromised the profitability of operations, biased commissions that put inappropriate investors in certain products, or the lack of market liquidity that prevents a quick exit from the position.”

Diaferia from Itaú points out that the bank is aware of the criticisms of the product and states that COE is not a “single thing,” but rather a family of products with various strategies, situations, negotiated and offered by different market agents. “Like any financial product, if it is not properly priced, it may not be beneficial to the investor. A specific COE strategy may not be considered good,” says Diaferia. “There are COEs in the market that we have seen, that I understand criticisms. But I cannot generalize that all COEs that were issued were bad.”

For Itaú executives, it is necessary to be careful with the evaluation of each type of COE and to look at the performance of COEs in the market as one evaluates investments in general. “If there is an offer of a COE indexed to B3, for example, and the stock exchange falls in that month, the COE also does not have a good performance. Am I going to say that the COE is bad because it was worse than the CDI? Not necessarily, because perhaps my COE performed better than the Ibovespa for the period, despite the Ibovespa falling. So, for that investor who made an allocation in the stock exchange, the COE may have been well thought out for an allocation in the stock exchange,” says Diaferia. For this reason, the Itaú product superintendent sometimes considers that “the criticisms are exaggerated”, since it is necessary to be careful with the type of comparison made.

Kimura from Itaú Corretora believes that “any product can be bad if it is not suitable for the investor’s profile. Even a super conservative fixed income product in a super aggressive client’s portfolio is poorly allocated.” For him, pricing, asset class, and suitability for each investor’s profile make the product suitable. “I think the criticism is very linked, because perhaps the product sales strategy in the market is not the most suitable, the pricing is not the most suitable, but you cannot criticize that the product is bad.”

According to Itaú executives, the COE product still has room for growth amid a maturing curve, “but it has had a healthy pace of market vision” and “given the flexibility, it fits in all scenarios and will always be on the bank’s shelf” to bring diversification alternatives to the investor.


Everything ready at B3 for the start of the Bitcoin futures market

Apr 16, 2024

The digital assets market is relatively new but has gained relevance worldwide not only due to the interest of individual investors but also institutional ones, which attracts regulators’ attention. Since Bitcoin entered the Brazilian market, dozens of other cryptocurrencies have begun competing for space in investors’ portfolios. The emergence of crypto funds and BTC ETFs, approved by the SEC earlier this year, are significant milestones in this market. Brazil is following the trend of institutionalizing crypto assets. The latest initiative is the creation of the Bitcoin futures market at B3, which begins operating this Wednesday (15). Analysts consulted by Capital Aberto discuss expectations for this new form of trading and also the major event of the week, the BTC halving.

For the director of new business at Mercado Bitcoin, Fabrício Tota, the Bitcoin futures market at B3 validates for more conservative investors. “Perhaps it was the boost that was missing, as it is not obvious to most people.”

From a classical point of view, the futures market is nothing more than an environment that allows hedging positions in the stock exchange, that is, protecting investments.

“This new derivative instrument will provide investors with an additional way to diversify their strategies and protect against Bitcoin volatility,” explains the head of cryptocurrencies at Hurst Capital, Francis Wagner.

According to him, by using the Nasdaq Bitcoin Reference Price index as a reference, the Bitcoin futures contract will be cash-settled, without involving the direct buying and selling of cryptocurrencies. “The presence of market makers initially will help ensure liquidity and reliability in price formation. This move by B3 reflects the growing demand for regulated instruments in the Brazilian crypto market,” says Wagner.

In the view of the head of cryptocurrencies at Hurst Capital, Bitcoin futures contracts at B3 will contribute to popularizing Bitcoin investment in Brazil, although they should not be seen as a revolutionary change in the game. “It will represent a significant evolution in the Brazilian financial ecosystem, offering investors more options to diversify their strategies and protect against Bitcoin volatility.”

However, Wagner warns that Bitcoin ETFs, already traded on B3, may be more interesting in certain aspects, especially considering managers’ commitment to holding the asset in their portfolios, which can affect supply in the market.

“The introduction of Bitcoin futures contracts at B3 has the potential to increase visibility and acceptance of Bitcoin in the Brazilian market, including for institutional investors. Opportunities for arbitrage between Bitcoin futures and ETFs traded in the local market may arise, which usually attracts more of this type of investor,” analyzes the manager and investment director at QR Asset Management, Theodoro Fleury.

After the Brazilian Securities and Exchange Commission (CVM), the sheriff of the Brazilian capital market, approved the manual with the rules related to this type of contract, the new Bitcoin modality will start operating on the Brazilian Exchange this Wednesday (17).

Bitcoin halving, which occurs every four years and is responsible for reducing the issuance of new bitcoins, will have a new element this year that could help boost Bitcoin after the event. We are talking about the Bitcoin spot ETF in the US, introduced in early 2024, which could positively influence the digital currency’s price.

According to the head of cryptocurrencies at Hurst Capital, expectations for the Bitcoin halving, which occurs on April 19, are quite optimistic, both based on historical analysis and the company’s perspective.

“Historically, halvings have been followed by significant increases in the price of Bitcoin, reflecting the growing interest in Bitcoin. However, we must consider the current scenario, especially with the introduction of ETFs in the US, which could positively influence the results after the halving,” explains the executive.

Despite this new element, Wagner believes that the continuous reduction in the supply of Bitcoin and the increasing demand for the asset will continue to drive the price up after the halving. In his assessment, another relevant point is the All-Time High (ATH), which has never been surpassed before the halving, but that has already changed this year.

“Historical trends suggest that a rise in the price of Bitcoin is more likely. As we have seen in previous halvings, the market usually responds with a significant appreciation of Bitcoin, fueled by the reduction in supply and the increase in demand,” highlights Wagner.

Although it is impossible to predict market behavior, especially considering factors such as the introduction of Bitcoin ETFs in the US, the head of cryptocurrencies at Hurst Capital sees the increasing scarcity of Bitcoin, its disinflationary nature, and the constant rise in interest attracting investors, thus driving the price of Bitcoin upwards after the halving.

On the other hand, the founding partner of Wetrade, Raquel Vieira, states that the expectation is good for the event, but the market has already priced in this movement, thus being more of a psychological price increase mechanism, since more than 90% of bitcoins have already been mined.

“But the market continues to have this pattern of a high every four years. In this cycle, it had a particular behavior because Bitcoin started hitting all-time highs before the halving. So, it could be something positive, since Bitcoin grew before the halving and may continue to grow afterward as in previous cycles,” analyzes Vieira.


Privatization of Sabesp attracts funds and industry groups

Apr 12, 2024

The long-awaited privatization of the São Paulo Basic Sanitation Company (Sabesp), a campaign platform of Governor Tarcísio de Freitas, is close to happening, as the public consultation ended last month. With this, the market’s expectation is to know who the interested parties are and who has the strength to make a significant investment.

According to estimates by Bradesco BBI, the value to be paid for the concessionaire should be around R$ 15 billion (U$ 3 billion).

The privatization model foresees the reduction of the State’s participation by up to 30%, a limit approved by the São Paulo State Legislative Assembly. The São Paulo government holds 50.3% of Sabesp’s shares, while the other 37.6% are traded on B3, and 12.1% are listed on the New York Stock Exchange.

According to analysts consulted by Capital Aberto, the auction is expected to attract companies from the sector, as well as private equity funds. Sabesp has the great allure in its concession, as it is mainly concentrated in the state of São Paulo, the largest consumer center in the country. The company serves nearly 60 million people, with 28.4 million receiving water and 25.2 million with sewage collection.

According to Phil Soares, head of stock analysis at Órama, the company is a reference in the Brazilian sanitation sector. “The market perception is that there is still a lot to be done in terms of efficiency.” He adds that the capitalization obtained through privatization will allow for a faster expansion of the network.

The sale of Sabesp will be similar to that of Eletrobras, with the government selling part of its shares. However, the model envisaged by Tarcísio de Freitas establishes the idea of a reference shareholder.

“The main difference between the two is that, in the case of Sabesp, the governor of São Paulo is seeking one or more strategic partners who are already in the business, who are interested in bringing expertise and aligning the interests of the private sector,” says Soares.

Regarding potential buyers of Sabesp, the head of stock analysis at Órama says that Equatorial is exploring the operation, as well as Votorantim and Pátria. “This is a very positive point because with the action of the sector, you will have new ideas, new technologies that can be brought to the company.”

In addition to the well-known players in the national scene, Soares points out that there are foreigners in the game. “We are talking about GIC, a fund from Singapore, which can be a relevant player, it is a classic infrastructure investor in Brazil,” he explains.

Still regarding potential interested parties, Gustavo Mueller, director of Fitch Ratings and specialist in the sanitation sector, emphasized that there are rumors about various groups. “Among the main private clients active in the sector, we are talking about Grupo Águas do Brasil, BRK Ambiental, Iguá Saneamento, and Aegea, which have a reasonably leveraged balance sheet. It will be necessary to design to bring in new money or a partner.”

On the positive side, these companies already know the sector and know how to operate sanitation in Brazil, which mitigates potential performance risks. On the other hand, companies like Votorantim, Cosan, and Veolia, speculated for the tender, Mueller warns that they will need a learning curve in the sanitation sector.

Among the interested parties are Equatorial and Cosan, as well as asset managers such as Yvy Capital, led by former minister Paulo Guedes, and Aegea Saneamento.

Pátria Investimentos, a strong candidate to participate in the Sabesp tender, said it cannot comment on the subject but stated that the infrastructure sector in Brazil is excellent for investing. “Today, despite the sectoral challenges and in the different segments of the infrastructure industry, this sector in Brazil has been a focus of Pátria, as well as of other investors,” says Daniel Sorrentino, partner and CEO of Pátria Investimentos.

Other potential interested parties, approached by Capital Aberto, declined to comment on the subject. Vinci Partners, one of the largest private equity managers, stated that “it is not commenting.”

Equatorial, in turn, stated that “the Equatorial Energy Group does not comment on specific business or acquisition possibilities,” as does Cosan, which will not comment on privatization. At the time of publication of this article, Capital Aberto was unable to contact Veolia and YvY Capital.

The São Paulo State Public Services Regulatory Agency (Arsesp) approved a tariff adjustment for the São Paulo state sanitation company of 6.44%, above inflation, a factor considered positive for the company’s privatization, as it further enhances its shares.

On Tuesday (9), the day of the announcement to the market, the asset closed up 0.33%, at R$ 84.78 (U$ 16.52) . This increase made Sabesp reach its highest market value, reaching R$ 58.07 billion (U$ 11.61 billion)

“The adjustment is positive for the shares since it was a fair adjustment and there was no state interference in the calculations. The company’s demands were met, it came out as expected, which is good, especially at this specific moment of privatization,” says Leonardo Piovesan, an analyst at Quantzed.

Despite the upward trend throughout this year, Soares emphasizes that Órama has a buy recommendation for the asset since Sabesp has room for operational improvement.


Two reasons weigh on foreign capital flight from B3

Apr 11, 2024

The flight of foreign capital in the first quarter of this year reached its worst level since the beginning of the pandemic. In March, investors withdrew a total of R$ 5.54 billion (U$1.108 billion) from B3 (Brazil’s stock exchange), leading to a negative result of R$ 22.89 billion (U$ 4.57 billion) in 2024. However, if we consider the month of April, up to the 8th, the most recent data from B3, the result is negative by more than R$ 23 billion (U$ 4.6 billion).

According to analysts consulted by Capital Aberto, two reasons explain this movement. One of them is the interest rate scenario in the United States, and the other is the economic policy conducted by the government of President Luiz Inácio Lula da Silva.

At the end of last year, with the Federal Reserve’s signaling of maintaining interest rates or starting a rate cut in 2024, there was a very strong flow of foreign capital into B3 in November and December, resulting from the significant gap in interest rates here and in the US.

As a result, at the turn of the year, the market positioned itself for the beginning of the cut, a fact that did not occur, as US data began to come in stronger than expected, with the interest rate cut being postponed by the Fed.

“The Fed needs inflation to start cooling down to deliver the magic number of 2%. With the worst macro scenario, the interest rate cut was postponed. At this moment, the expectation is that the cut will start from July onwards, becoming more towards the last quarter of the year,” explains VG Research’s chief analyst, Luan Alves.

According to him, this postponement of the cut in the US led foreign capital to withdraw not only from Brazil but also from emerging markets as a whole. “Brazil was worse off marginally, despite weak data in China as well. Brazil has a correlation with China, Fespecially in commodities.”

As an example, he cites steel and mining stocks, which have accumulated a significant decline in 2024. In the year, shares of Vale (Brazilian multinational corporation engaged in metals and mining), which dominate the trading volume of the Ibovespa, fell by 16.64% until the close of Wednesday (10), while CSN had an astonishing drop of 27.01%.

“In general, this foreign flight is related to the macro scenario, mainly due to the interest rate policy in the US, which is less permissive with inflation,” explains Alves.

Asked about the possibility of a reversal of this scenario in the short term, VG Research’s chief analyst believes that there should not be an improvement in sentiment at least until June or July. “An improvement should happen from October onwards.” The US inflation released this Wednesday (10), for example, corroborates with this perception, with a rise of 0.4% in March, above the market’s expectation of 0.3%, reinforcing the difficulty for price deflation in the country.

In addition to the interest rate differential between Brazil and the US, Warren Investments’ multi-market manager, Eduardo Grübler, states that most of the foreign investor outflow was to realize profits after the strong gain in 2023. “We are very small on the global scale, so the inflow and outflow of foreigners have a significant impact on the Brazilian stock market,” analyzes Grübler.

Until April 10th, the Ibovespa, the main index of B3, accumulated a decline of 4.57% this year.

Although the US has a large share in this foreign capital flight from the Brazilian stock exchange, due to the interest rate differential with Brazil, the economic policy of the Lula government also contributes to the movement. According to Murillo Torelli, professor of financial and tax accounting at Mackenzie University, the government’s interference in state and private companies has been crucial.

“The instability generated by these interventions negatively affects investor confidence, harming the performance of the stock market. This uncertainty about government policies creates an unstable environment for business, discouraging potential investors and contributing to the outflow of capital from the stock exchange,” emphasizes Torelli.

Alves, from VG Research, has the same perception about the Brazilian government. According to the analyst, greater government interference in the first quarter of this year, in addition to the loss of popularity, led to political noise in companies like Petrobras and Vale.

This intervention, however, seems not only in the two giants of the commodities sector. The Mackenzie professor also mentions Eletrobras, which is now in the spotlight, as the government expresses its intention to reverse the privatization established in Jair Bolsonaro’s government.

“It is crucial that the government reevaluates its approach to state and private companies, adopting a more transparent and pro-market stance. Stability and predictability are essential to attract investments and promote sustainable economic growth. Otherwise, we run the risk of seeing more foreign investors distancing themselves from the Brazilian market, further aggravating our economic situation,” concludes Torelli.


Analysts point out positive factor that may aid Sabesp privatization

Apr 10, 2024

The 6.44% tariff adjustment in Sabesp (Brazilian water and waste management company) rates is seen as a positive move by analysts consulted by Capital Aberto, as it is expected to assist in the process of privatizing the concessionaire, since it surpasses the inflation of the last 12 months, which stood at 4.50%. The new rates will come into effect from May 10th.

For the adjustment, the Regulatory Agency for Public Services of the State of São Paulo (Arsesp) took into account factors such as economies of scale and the elimination of past adjustments, typical for this type of regulation. However, the regulatory agency omitted a request from Sabesp, which sought to include in the adjustment the effect of tariff discounts given to large consumers.

In a report published this Tuesday (09), Bradesco BBI emphasizes that the adjustment above inflation is positive for a public company like Sabesp, especially as it is on the verge of privatization, as it is expected to increase the value of shares.

Flavio Conde, an analyst at Levante Investimentos, shares a similar view. “(With this adjustment) privatization becomes more attractive, since those evaluating privatization imagined a 4% adjustment. This adjustment will be factored into valuation models, allowing for a higher bid for the company.” According to him, with this adjustment, Sabesp’s revenue will be higher, as will cash flow. “Everything is very well-rounded, very well-done. I am very excited (about privatization).”

Sabesp’s common stock closed the session up 0.33%, at R$ 84.78 (U$ $16.96). Earlier, when the market was still digesting the tariff adjustment, shares rose nearly 1%.

The São Paulo state government is the majority shareholder of Sabesp, with 50.3% control of the company. The remainder is dispersed in the market. The privatization project envisages the sale of most of these shares, but with the government retaining veto power.As the company is listed on the stock exchange, the amount to be pocketed by the government will depend on the stock price at the time of the auction. According to Conde, the auction is expected to take place in June. With privatization, the state government expects investments of R$ 68 billion (U$ 13,6 billion) in sanitation by 2029, and R$ 260 billion (U$ $52 billion) by 2060.


Retailers offering financial services end year with decline in delinquency

Apr 9, 2024

Major Brazilian retailers that operate financial services saw a reduction in delinquency in the last quarter of 2023. According to Fitch Ratings, this could indicate a gradual trend for the coming quarters, which will be essential for these companies to preserve their credit profiles and recover cash flows from 2024 onwards. The improvement, although moderate, interrupts a trajectory of severe deterioration that began in late 2021.

According to Renato Donatti, director at Fitch Ratings, the reduction in delinquency is due to a combination of two variables. “The first, a somewhat more macro variable, is that we are already beginning to feel a bit of additional income in people’s pockets, whether through increased employment rates or the partial reduction captured in interest rates. We have come down from the peak of almost 14% to 10.75%, which already brings an improvement,” he says. “The second variable, as important or even more important, was the fact that companies are also a bit more disciplined in controlling credit granting, with two exceptions, MercadoLibre (Argentine e-commerce company) and C&A (multinational chain of retail clothing stores), which continued to offer credit in a somewhat more robust manner,” Donatti adds.

The average of delays exceeding 90 days in the financial services of C&A, Carrefour (French multinational retail and wholesaling corporation), Grupo Casas Bahia (Brazilian retail chain specializing in furniture), Guararapes, Magazine Luiza (one of the biggest Brazilian retail companies), MercadoLibre (Meli), and Lojas Renner(one of the largest Brazilian fashion retail companies) decreased to 15.3% in the fourth quarter of 2023, compared to 16.7%, 17%, and 16.6%, respectively, in the third, second, and first quarters of the year, but it remains significantly above the 13.4% recorded in 2022 and the 9.8% in 2021.

The additional income from the thirteenth salary is a seasonal factor that may have favored delinquency rates at the end of the year, but this trend was not observed in the last two years, which also contributes to the expectation of a downward trend throughout 2024.

“The 15.3% represents a drop compared to the very high numbers we saw, especially throughout 2023 and the end of 2022, but if we look at the historical average, they are much lower than that. Historically, these numbers were between 9% and 11%, excluding the pandemic period,” Donatti points out. “They rose significantly since 2021, remained high for a good period, reflecting higher inflation levels in the past and the sharp increase in interest rates.”

Despite the improvement in delinquency, in terms of stock performance, 2023 was unfavorable for the retailers analyzed by the credit rating agency. Of the 6 companies, 4 of them had a negative total return—stock performance plus dividend payments—during the year.

Only Guararapes, owner of Riachuelo, and Lojas Renner ended 2023 with a positive return.

Among the companies classified by Fitch, MercadoLibre showed the greatest reduction in delinquency in its financial services, to 18.7%, from 24.5% on average in the first three quarters of 2023. C&A, on the other hand, showed a more moderate reduction, to 18.8%, from 21% previously, and still faces the challenge of presenting a more significant improvement in its financial activity results. In turn, Guararapes recorded a slight decrease, to 18.4%, from 18.7% in the third quarter, but still above the average of 17.8% for the first three quarters. Nevertheless, it ended 2023 with the lowest indicator of the three companies.

According to Donatti, Meli comes from a stronger growth in the portfolio, along with C&A, which are the most recent companies in this credit granting segment.

“They reached a delinquency peak of almost 30% in the fourth quarter of 2022, and we believe that, at this moment, growth rates remain high but are lower than in the past. They already have a relatively well-established credit portfolio, which allows the company to be more assertive in granting credit,” says Donatti, adding that the statement also applies to C&A, which has been increasing the portfolio and improving delinquency. “We saw a slightly better number in the 4th quarter, although we cannot say that this is a trend that will continue throughout the year, there are important factors that lead us to believe that the overall scenario will be a little better, but this will also depend a lot on the appetite of these companies to continue growing.”

In 2023, the credit portfolio of these companies grew by 8%, strongly influenced by the expansions of C&A (+71%), Meli (+33%), and Carrefour (+24%). Guararapes (-7.3%), Casas Bahia (-3.6%), Lojas Renner (-2.7%), and Magazine Luiza (-0.9%) took a more cautious stance and reduced originations during the year, given the adverse scenario for their retail segments and greater financial pressures on their balances, except for Renner, which has a stronger balance sheet.

Despite the decline, the credit rating agency points out that the sector will still face challenges. Donatti states that factors such as high family indebtedness, decreased credit grants, and high interest rates are determining factors.

“Combined with indebtedness, retail, especially discretionary, typically depends on credit. And when we see a scenario of deteriorating delinquency, we see companies holding back a bit on granting credit. This, to some extent, ends up being limiting. And that’s why it’s important for delinquency to start falling at a slightly faster pace, so that companies feel more comfortable returning to granting more credit, thus also helping retail performance,” Donatti points out.

For 2024, Fitch believes that retail is expected to improve. “This aligns somewhat with these more controlled inflation levels. We have a resilient employment level and a minimum wage increase of about 7%. We believe this is an important factor in restoring some of the income that has been affected by inflation over the past three years. This 7% adjustment, by itself, will not restore 100% of purchasing power, but it helps,” says Donatti.

Marco Saravelle, chief strategist at MSX Invest, states that the sector is receiving many stimuli, with debt renegotiation for the population and injection of resources by the government, which naturally tends to reduce delinquency. “At first, I agree that we have much more positive news than negatives on this point. We have to look not only at retail results, but mainly at banks. And I think it’s a certainty that there won’t be an explosion of delinquency, a significant worsening, which is the major concern. I think that’s the main point,” Saravelle points out.

“The performance of stocks has been greatly determined by the long-term interest rate curve, not because of these more specific factors, but, in a way, in terms of delinquency, we have a positive surprise for banks and for retail as a whole for the year.”

For 2024, Fitch still has a neutral outlook for the sector, on top of a weak base in 2023. “At the end of last year, we also saw several companies improving inventory levels, taking advantage of the end of the year to make some promotions, entering 2024 with more controlled levels. All of this indicates that this year has everything to be better for retailers than 2023,” comments Donatti, who mentions the Americanas event and the wave of short-term refinancings. “What we have seen now is that the market is really more liquid and this has allowed companies, not only retail ones, but especially those we mentioned here, to refinance their debts with longer terms,” says the director of Fitch.

Caroline Sanchez, a retail analyst at Levante Inside Corp, analyzes the data from retailers and believes that the first half of 2024 will still be cautious for the market. “In this first semester, I believe the market should be, in general, a little more cautious about taking a little more risk. I believe that during this period, the focus will be more on the macro, but looking at the second semester, we will be able to focus more on the micro, on the quality of companies, look at valuation, and in terms of interest rate reduction, it should favor more leveraged companies,” says Caroline. “This is an issue that contributes in two aspects, both from the point of view of stimulating population consumption, as well as being able to contribute in relation to the cost of capital of these more leveraged companies.”


Investment funds record second highest net inflow in the last five years

Apr 8, 2024

The positive start to the year for the investment fund industry can be explained by several factors. Technically, the two marked by a massive outflow of resources partly justify the high percentage increases in the indicators. Falling benchmark interest rates and regulatory changes that limited access to tax-exempt products also played in favor of greater attractiveness of the funds. The result was a first quarter with a net inflow of R$ 105 billion (US$ 21 billlion), the second best in the historical series of the last five years. In the same period of 2023, funds lost, also in net terms, R$ 73.4 billion (US$ 14.68 billion), according to data from the Brazilian Association of Financial and Capital Markets Entities (Anbima).

“Products such as LCI (Real Estate Credit Letter), LCA (Agribusiness Credit Letter), CRI(Real Estate Receivables Certificate), and CRA (Agricultural Receivables Certificates) offered a very interesting return with low volatility and were tax-exempt. As they become more restrictive, fixed-income funds and infrastructure funds end up gaining more activity,” comments Pedro Rudge, vice president of Anbima, mentioning one of the factors that contributed to the industry’s good quarter.

By the end of March, funds had accumulated assets totaling R$ 8.7 trillion (US$ 1.74 trillion), 15.5% higher than in the same period last year. Other figures presented by Anbima this Friday (05) reinforce the sector’s recovery momentum. There was an increase of 6.9% in the number of accounts, 6.2% in the number of investment funds, and 8.3% in the number of fund managers.

The recovery of investment funds this year until March, however, is not happening linearly. Multimarket and equity funds are going against the trend and losing assets, while fixed-income funds maintain their appeal. Multimarket funds lost a net amount of R$ 28.2 billion (US$ 5.64 billion), while equities saw much smaller outflows of R$ 2.1 billion (US$ 420 million) in the quarter. Once again, fixed-income funds are driving the industry’s performance, having captured nothing less than R$ 131.7 billion (US$ 26.34 billion).

Another highlight in Anbima’s press conference was the performance of infrastructure funds, which, in Pedro Rudge’s view, benefited from regulatory changes at the beginning of February that limited access to incentivized products related to agribusiness and real estate. In the first quarter, fixed-income infrastructure funds captured R$ 22.2 billion (US$ 4.44 billion). Just in March, after the measures, R$ 9.3 billion (US$ 1,86 billion) flowed into the product. “Fixed-income and fixed-income infrastructure funds are receiving a portion of these resources that were going into tax-exempt securities. This explains part of this positive inflow,” says Rudge.


The Central Bank of Brazil is keeping an eye on US inflation data and is not attempting to “contain the dollar” through intervention

Apr 4, 2024

In a scenario marked by expectations about the direction of US monetary policy, all eyes are on data regarding the behavior of the American economy, hoping for a signal about the start of cuts to the Fed funds rate. The president of the Brazilian Central Bank, Roberto Campos Neto, even stated on Wednesday (03) that the numbers on April 10 are important to define the next steps of the Fed. He refers to the CPI – data on American inflation. Campos Neto, speaking at an event hosted by Bradesco BBI, reiterated the challenging global scenario, mentioned the resilient service inflation, and denied that the Central Bank, with its exchange intervention, had attempted to contain the dollar.

“We embarked on a disinflation process, which stalled. Some people call it the last mile, last kilometer. And in this event we had a month and a half ago, some people said that the last mile was already done, and I said I didn’t think so. I think in the minds of central banks, especially the Fed, this is not true,” said Campos Neto. The BC president added that inflation cores have fallen, but now at a slower pace and, in some places, have stalled. “In others, it started to rise a little. We also see some emerging countries with a similar dynamic.”

“In the US, we see that headline inflation has started to stall around 3.2%. The number that will come out on April 10 is very relevant because the Fed needs to have a narrative about the disinflation process, and it has remained with a greater degree of uncertainty because some things that were identified as disinflationary factors are not proving to be so disinflated: labor, real estate, energy has started to rise a bit again, so this will also be a challenge,” he points out.

According to the Central Bank’s survey, almost all developed countries have an equal expectation of interest rate cuts, unlike the scenario in Latin America. He considered it important to emphasize that Brazil has, over the past few years, been able to work with lower real interest rates, although still high, and he affirms that the disinflation process is “more or less in line with what the authority understands.”

During his participation in the event, the BC president also commented on the intervention made in the exchange market the day before, with the sale of US$1 billion in foreign exchange swap contracts. “Our intervention had nothing to do with the exchange rate movement; we always say that the exchange rate is floating. It is important for the exchange rate to be floating because it functions as an element that absorbs shocks and then redistributes resources more efficiently.” According to Campos Neto, the reason for the intervention was the maturity of NTN-A3. “We thought it was significant, that there could be some dysfunction on the day, and that is why an intervention was made. We mentioned this in the intervention text; many people did not notice.”


Requests for Judicial Recovery by individual farmers in Brazil increase by 535% and reinforce risks linked to rural credit

Apr 2, 2024

The “agro crisis” resulting from factors such as reduced commodity values, crop failure due to climatic issues, high interest rates, increased production costs, and farmers’ indebtedness have concerned the market and generated pressure for actions to foster the sector. Among those affected are individual rural producers, who saw a 535% increase in requests for judicial recovery (JR) in 2023, according to Serasa (the largest credit bureau in Brazil) data. The number of requests for this recourse rose from 20 in 2022 to 127 the following year. Just from the third to the last quarter, there was a 62% increase.

If previously, problems in the sector – whether in agribusinesses or their individual owners – almost exclusively affected public banks that financed the harvest, today the sector utilizes instruments from the capital market to raise funds. With investment funds from agribusiness production chains, Fiagros (an investment fund in agro-industrial chains), and Agricultural Receivables Certificates (CRAs) growing in importance, rural issues reach even Faria Lima, worrying managers and investors.

Data released on Monday (01) by CVM (Brazil’s Securities and Exchange Commission) show that the CRA market grew by 35.8% in 2023, reaching US$ 25 billion (R$ 130 billion). Fiagros, on the other hand, grew by 103% in the same period, reaching US$ 4.2 billion (R$ 21.3 billion), an evolution almost 10 times greater than fixed income, variable income, and investment funds markets, which grew by 11.2%, on average, in the period.

In a note, Serasa Experian’s agribusiness head, Marcelo Pimenta, commented that “when we consider the number of judicial recovery requests relative to the millions of people engaged in agricultural activities, the number of judicial recoveries seems small, but the speed at which these requests are growing quarter by quarter is concerning. In addition to climatic issues, which have led to crop failures in several regions and increased management challenges, the economic scenario, both nationally and internationally, has not contributed to creating financial stability in the field.”

With the use of artificial intelligence created by Serasa, the Agro Score, the entity identified that the majority of requests for judicial recovery stem from poorly evaluated credit decisions over the last 3 years.

According to Serasa’s findings, the rural producers who requested judicial recovery the most were those with larger areas planted with soybeans via remote sensing analyses, followed by pasture areas, and then coffee.

Felippe Serigati, a researcher at FGV Agro, points out that in the course of 2024, there may be a new increase in requests for judicial recovery. “I think not everyone who is on the brink has already made their request, but the scenario, perhaps, will not be as uncomfortable as it was throughout the first semester. We have better rainfall volumes at the end of February, March, and even in the first half of April. Especially for corn producers who manage to start the harvest a bit earlier, or at least not so late, I think the situation is a bit more favorable,” comments Serigati.

Challenges of agribusiness

Among the sector’s challenges, Laura Bumachar, an expert in Judicial Recovery and Bankruptcies and partner at Dias Carneiro Advogados, cites the crop failure in 2023 due to severe drought and the increase in credit costs.

“Today, the government is not the only one financing agribusiness. On the contrary. You have a soup of securities, such as CDA and WA, CPR, CRA, all financed by the private sector. And, with the rise in interest rates, this CRA also became a bit more expensive, in the end. There have been several processes of judicial recovery for farmers, which is a bit worrying, precisely because it further increases credit costs, especially if judicial recovery is not the appropriate remedy for this type of situation,” points out Laura.

The Selic rate is in a downward trend, but the cost that agribusiness is paying in the current harvest is the financing cost established last year, during the preparations for planting, making credit for the sector more expensive.

“Although the Selic rate is falling, the long-term interest rate curve is not exactly following the same dynamics; there are many uncertainties regarding the Brazilian economy, and that is the point. Credit, for the Brazilian economy as a whole, is not expected to fall to the same extent as observed in the Selic,” Serigati points out.

The specialist also mentions the importance of this year’s Harvest Plan, which will be discussed later, but emphasizes that it addresses only a limited fraction of the sector’s total financing needs. “Most of the resources that agribusiness needs to carry out its productive activities throughout a harvest come from within the chain itself, and the sector has developed several instruments to enable these operations. Behind these instruments is a calculation of who is providing this credit, this financing, which is sensitive to market conditions, notably the future interest rate curve of the Brazilian economy,” he points out.

Credit relief package

In order to curb JR in the agricultural sector, the government intends to announce a new credit package with longer terms, smaller installments, and lower interest rates. The concern is that the “unbridled granting” of JRs may harm the agribusiness financing market, making credit even more expensive.

Camila Crespi, an expert in corporate restructuring at Luchesi Advogados, states that Judicial Recovery is an effective measure for economically viable companies and is extremely useful as long as it is carried out within legal standards, aiming at maintaining jobs, preserving business activity, and recovering credit.

“What happens is that we see a movement of trivialization of the institute and unrestrained use of processes to resolve issues that could often be subject to extrajudicial renegotiation, mainly with a view to preserving credit. The misuse of the remedy, in addition to harming the rural producer, ends up harming the entire credit system, which can cause an even greater collapse, besides legal uncertainty,” points out the lawyer.

Although there are no details yet, the goal is to create additional credit lines with BNDES (Brazilian Development Bank) to refinance debts of producers, agricultural input distributors, and machine and fuel retailers.

“I think the main focus will be on debt renegotiation, payment postponement, something in that direction. I think the budget dispute will be different in the harvest plan, and it’s not for now either. We would love it to be, but it probably won’t be,” says Serigati. “It will be announced at some point in June, early July, according to the official calendar, but I would also like it to include something more associated with insurance. What I hope for from the package are measures like debt renegotiation and payment postponement, but I would like it to strengthen the rural insurance program,” he concludes.


Foreigners are pulling out of the Brazilian stock market, but until when?

Apr 1, 2024

The dashed expectations regarding monetary policy easing in the United States are the common factor in the discourses explaining the exodus of foreigners from the Brazilian stock market. But it’s not the only one. In the risk assessment balance evaluated by foreign investors, domestic fiscal concerns, interference in Petrobras, and the high Selic interest rate, which increases the cost of the foreign exchange hedge made by foreigners, are also included.

The last year with a net outflow of foreigners from B3 was 2019, with only US$ 1.29 billion (R$ 6.5 billion) withdrawn. The last three years saw an inflow of funds, with R$ US$ 8.25 billion (41.5 billion), US$ 23.8 billion (R$ 119.9 billion), and US$ 11.1 billion (R$ 55.9 billion), respectively, in 2021, 2022, and 2023. In the accumulated total for the first quarter of this year, up to March 26th, B3 has already lost a net amount of US$ 4.47 billion (R$ 22.5 billion) in foreign resources. If the US$ 2 billion (R$ 10 billion) leaving the futures market are added, the US$ 6.46 billion (R$ 32.5 billion) represents more than half of all the inflows into the stock market last year. The good news is that, according to those interviewed by Capital Aberto, the strong outflow of foreign funds is a sign that the negative scenario has already been priced in, meaning that the capital flight from now on either stops or slows down.

“The market, anywhere in the world, will always move in an anticipatory manner; the volume leaving B3 has already factored in the expectation of no rate cuts by the US in the next meetings. From now on, if there is no new development, the outflow will be smaller,” explains Rafael Oliveira, equity manager at Kinea. “That’s why I also understand that when signs of improvement begin, when the Fed starts cutting rates, funds will start coming back.”

One of the factors contributing to the array of reasons for the exodus, adds Oliveira, is the very high domestic interest rate, which increases the cost of the currency protection strategies set up by foreigners operating in Brazil. “When doing hedge operations to protect against real depreciation, they buy currency in the futures market, and the high CDI (the Brazilian interbank deposit) impacts the cost,” he comments. “When the domestic interest rate is lower, it will not only stimulate the stock market but also make it less costly for foreigners to set up a hedge.”

The perception of Brazil’s risk is another factor cited as important for the attractiveness—or lack thereof—of foreign investors. “In addition to disappointment with the Fed, fiscal issues and interference in Petrobras dividends have amplified the outflow of funds,” comments Leonardo Otero, partner at Arbor Capital. He mentions that the 2050 NTN-B paid, in December, a yield of 5% and jumped to 6% this year, reflecting a higher risk premium demanded by investors for buying Treasury securities. “Foreigners coming to the country have a short-term view and await any signs of improvement to return.”

Data collected by Elos Ayta Consultoria in partnership with the Investing.com platform showed that B3 had the worst performance among 41 evaluated stock exchanges worldwide, with a decline of 4.53%, to 128,000 points. The second worst performance was recorded by Thailand, with a 3.21% decline, and Hong Kong, with a 2.97% decline. Countries like India (Nifty 50) and Russia (MOEX) saw their stock markets advance by 2.74% and 6.75% in the quarter, respectively. In the US market, the S&P 500 VIX advanced 4.5% and the Dow Jones 5.62%. Analysts cannot assert whether the exodus of foreigners from B3 led Brazilian dollars to other stock markets or even to local fixed income, which benefits from the Selic at 10.75% per year.

The largest bets on US rate cuts, highlights Bruno Lima, stock analyst at BTG Pactual, are concentrated in June, with something close to a 65% probability. “It’s not only the timing of the start of cuts that matters, but also the quantity. At the beginning of the year, we talked about five or six cuts; today it has dropped to two or three,” comments Lima, adding that marginal improvements in some variables such as GDP, inflation anchoring, and fiscal issues will make the stock market move.

In Lima’s view, another factor that enhances a stock market recovery is that the decline, so far, has been very concentrated in a few companies. The two companies with the greatest weight in the Ibovespa, Petrobras (PETR3) and Vale (VALE3), suffered from political noise. The oil company experienced a first quarter of volatility, despite closing the period almost unchanged, with a slight increase of 0.32%. The balance sheet data were resilient, in line with expectations, but the decision to withhold extra dividends distribution dropped the shares by 10.5% in a single day, after the announcement. Part of the foreign exodus is linked to Petrobras, analysts say. Vale, on the other hand, plummeted by 17.67% in the period.

“There is a universe of other companies, from other sectors below the surface of the Ibovespa, to advance. Again, with few improvements, we see the Ibovespa performing well this year.” One of the indicators mentioned by the BTG Pactual executive is the P/E ratio of the Ibovespa, considering Petrobras and Vale, around eight times, below the historical average of 10.8 times. “The same goes for small caps with a P/E ratio of nine times against a historical average of 15.” About foreigners, he recalls that although they are responsible for around 54% of the monthly traded volume, their weight was much higher in the past.

“Everyone is monitoring the probabilities of cuts in the fed funds in June, as well as macroeconomic data that reinforce this possibility. Even before the cut materializes, this probability improving already helps the stock market and eventually the return of the funds that left,” comments Bruno Lima. BTG Pactual does not have a call for the Ibovespa at the end of the year, but works with various scenarios. In the most conservative one, the main stock index of B3 stands at 125,000 points, in the most optimistic, it can close the year at 155,000. “The return of foreign funds is important for the most optimistic scenario, but not only that. Local mutual funds also have a low allocation in equities and need to resume investments in the market.” Today, equity and multimarket funds have about 9.6% of assets allocated in stocks.


Minutes of the Brazilian Monetary Policy Committee reaffirms pursuit of flexibility

Mar 27, 2024

The minutes of the Brazilian Monetary Policy Committee (Copom), released this Tuesday (26), reinforced a change signaled in the statement after the last meeting when it reduced the Selic interest rate by half a percentage point to 10.75% per year, marking the sixth consecutive cut. The reading of the minutes reinforces the view that the committee seeks greater flexibility in monetary policy. In practice, a cut at the same pace is scheduled for the next meeting. Furthermore, there is no clarity.

“The tone of the Copom Minutes was neutral compared to the post-meeting statement, with the monetary authority providing details about the major uncertainties identified in the domestic and international environments and, consequently, the need for greater flexibility in conducting monetary policy,” evaluates João Savignon, Head of Macroeconomic Research at Kínitro.

Itaú’s view, brazilian financial services company, expressed in a macroeconomic analysis report signed by the bank’s chief economist, Mário Mesquita, goes in the same direction and reinforces that the Copom minutes brought a more detailed discussion about why future signaling was shortened. “The committee emphasized a cost/benefit analysis of this decision, where the advantage of lower volatility was recently outweighed by the cost of inflexibility in a more uncertain environment, both in terms of activity outlook and inflation,” the report says. “Authorities also reinforced that the change in future signaling should not be confused with an indication of a change in the dimension of the easing cycle.”

The report highlights paragraph 23, considered a “crucial excerpt” from the minutes, where the Copom emphasized that new data disclosures will be essential to define both the pace and, especially, the terminal rate. “We maintain our view of a terminal rate of 9.25% per year, although also data-dependent.”

In the analysis of domestic inflation dynamics, the minutes mention that, on the one hand, there is a benign behavior of food and industrial goods, but on the other hand, due to resilient activity and recent disclosures, doubts arise about the speed of disinflation of services. “The committee noted that a slower disinflation process, both domestically and globally, is not the baseline scenario but has been incorporated as a source of uncertainty. This increase in uncertainty prescribes caution in conducting monetary policy.”

Savignon, from Kínitro, comments that regarding domestic inflation dynamics, the minutes observed, on the one hand, a benign behavior of food and industrial goods, but on the other hand, showed doubts about the speed of disinflation of services. Regarding future signaling, he states, “the minutes took stock of the use of forward guidance, reinforcing that it fulfilled its role of coordinating expectations, increasing the potency of monetary policy, and reducing volatility. It then debated communication for a scenario that requires more degrees of freedom (or flexibility) to conduct monetary policy.” The economist maintained the projection that Copom has the conditions to continue with interest rate cuts at a pace of 50 bps in the May and June meetings, slowing down the pace in the second half of the year.


Infrastructure debentures prioritize energy transition projects in Brazil

Mar 26, 2024

The decree regulating the issuance of “infrastructure debentures” and “incentivized debentures” will be signed today by President Luiz Inácio Lula da Silva. The document has been eagerly anticipated due to expectations that some sectors would be prohibited from issuing the new instrument, the infrastructure debenture, created by Law 14,801 of this year.

According to Brazil’s Ministry of Finance, one of the improvements established by the new decree is the streamlining of access to the financing mechanism. Additionally, projects that generate significant environmental or social benefits will be prioritized, while activities that harm the environment will be excluded. Sectors such as petroleum and non-renewable energy generation will not be prioritized.

“The idea is to boost investments committed to climate neutrality, sustainable development, and social inclusion,” says the government’s statement. Projects related to energy transition, such as low-carbon hydrogen production, synthetic fuels, carbon capture, and strategic mineral transformation projects, become a priority.

Infrastructure debentures enter the market as a complement to the well-known “incentivized debentures,” which are also regulated by the new decree. Another improvement established by the decree, as stated in the government’s statement, is the streamlining of access to the financing mechanism, “while maintaining the federal government’s management capacity over the progress of public policy.”

Another highly anticipated aspect for the market concerns the exemption of projects from prior evaluation by ministries. The prior publication of ministerial approval for projects is no longer required, “with the project owner ensuring its compliance with the requirements established by the decree.”

The law on incentivized debentures, dating back to 2011, offers reductions in Income Tax rates to individuals and legal entities investing in projects considered priorities in infrastructure areas. For legal entities, the tax rate on income from acquired debentures is reduced to 15%. For individuals, it is reduced to 0%.

During the signing ceremony, the Brazilian Chief of Staff, Rui Costa, commented on a recent trip to Saudi Arabia and their interest in investing in infrastructure. “We heard a strong willingness to invest in Brazil from them. However, their decision is to invest without necessarily being project managers. They want to have a stake, and debentures are an important stake.”


Securitization companies say that limits on CRI and CRA have little impact on business

Mar 26, 2024

Nearly two months after the publication of Resolution 5,118 by the Brazilian National Monetary Council (CMN), which changed the rules for issuing Agricultural Receivables Certificates (CRAs) and Real Estate Receivables Certificates (CRIs), securitization companies describe a discrete effect on their businesses and see a positive scenario for the securities, even with the restrictions. One reason is that the prohibited issuances, made by publicly traded companies that were not in agriculture or real estate, as well as by financial institutions, had lower profitability. Another factor is that there are alternatives for this group of companies, also through securitization, to raise funds.

Capital Aberto spoke with three securitization companies of different sizes to understand the impact of the CMN measures. OPEA, Grupo Travessia, and Leverage Securitizadora highlight a benign scenario for activity and CRI and CRA issuances, even though specific segments have been prevented from conducting operations. “At OPEA, the companies that were prohibited from issuing the securities were not so relevant. Even in terms of remuneration for the company, these operations had a lower return. It doesn’t affect our business,” says Flavia Palacios, CEO of OPEA. “It’s not bad for the market, which ends up adapting; there are other ways to raise funds.”

The CEO adds that even for companies now prohibited by the regulator from issuing the securities, there are other options. “Those who can no longer issue CRI or CRA will, in my view, seek other securitized products, remain as clients, and may use a CR (Receivables Certificate), an FIDC (Fund of Investment in Receivables), or a securitized debenture. They will turn to, let’s say, the root products in the securitization universe,” comments Flavia.

OPEA has more than 40 securitization operations in structuring representing more than US$ 2 billion (R$ 10 billion), a number very similar to what it had a year ago. “And we have a mandatory volume 40% higher than we had last year; that is, despite the CMN rule negatively affecting the volume of market transactions, reducing the possibilities of issuing CRI and CRA, the natural market growth, and, eventually, the change in fundraising product, more than compensated.” OPEA’s numbers include, in addition to CRI and CRA, CR transactions and securitized debentures.

For Vinicius Stopa, partner at Grupo Travessia, more significant reductions in the CRI and CRA market, due to the new rules, should be felt in March and April operations, but without an impact on the securitizer. “There hasn’t been much change for us because we didn’t do the type of transaction that ended up being restricted. They were companies that accessed the market with cheaper borrowings and were not on our radar,” comments Stopa. “We focus on structured credit portfolio operations.”

Regarding the impact on the market as a whole, the partner at Travessia says there are estimates that it could be up to 30% less. “This is adding up the companies that were prohibited from issuing and those that issued for reimbursement, now prohibited,” explains Stopa. The executive refers to an item in the resolution that prohibits the use of funds for expense reimbursement, only for future investments. “Those who used it for reimbursement usually did so for two reasons, either because they did not have access to bank credit or because the CRI was more attractive. They will have to find another way out.” The securitizer has 12 transactions in structuring representing close to US$ 60.2 million (R$ 300 million).

Data consolidated by Clube FII, at the request of Capital Aberto, show that until this Monday (25), CRI and CRA issuances reached approximately US$ 460 million (R$ 2.3 billion), 30% less than in March 2023 (whole). In the year-to-date, however, US$ 1.79 billion (R$ 8.9 billion) of CRIs and CRAs were issued, an important advance over the same period last year, with US$ 1.33 billion (R$ 6.6 billion) raised. Although the Resolution came into force on February 2, many operations were already contracted.

Leandro Issaka, founder of Leverage, a securitization company focused on the middle market, recalls that the effects of changes in the rules do not affect the niche in which it operates, regarding the issuers, but rather in relation to the use of raised funds for expense reimbursement. “For smaller developers, the CRI was important for reimbursement; it was a very simple operation. Now to obtain it, we have to use a mixed asset,” comments Issaka, who has a different understanding of the Resolution and found a way to meet clients’ needs.

“Now it’s more expensive and more complex, but it’s possible. I issue a CRI with two assets, one debt security, and another from the portfolio already sold. Thus, I can use part of the funds for reimbursement,” comments Issaka. “What was prohibited is the issuance of CRI/CRA with assets resulting from ‘financial transactions whose funds are used for expense reimbursement,’ but it was not prohibited, for example, an issuance operation of the CRI with collateral in a Commercial Note that reimburses the construction costs of the developer.”

Technology facilitates risk control

The Leverage executive, a company that has been on the market for just over a year, states that even with restrictions, there is plenty of room to issue and distribute securities, citing the importance of technology; “In the middle market, it is difficult to assess the risks of the paper itself, there is little information. The solution was to seek big data, gather information from Serasa, from the IRS, everything possible to measure that risk properly. It is possible to price better, with a more adjusted cost, which encourages the entire chain.” The securitizer is preparing its first issuance with QR Tokenizadora and TG Core/Trinus of a Tokenized CRI with blockchain technology. “We will test the format, it is safer, faster, and all in a regulated environment, in the regulatory sandbox, which is important for risk management.”

OPEA and Grupo Travessia share the same view that technology will be a facilitator for structuring offerings and distribution, but only if they add real value. “Technology can be a way to reduce costs, bureaucracy, and this is very positive. It can also be a way to distribute,” comments Flavia Palacios, CEO of OPEA. “Here we are agnostic; anything that comes and really delivers value to us is good. Regarding tokenization, we are looking at its development, but I believe it is something for the medium term.”

At Opea, Flavia highlights, there are significant investments in technology, including enabling the platform to connect to various tokenizers in the market. “This connection applies when the tokenization object is a CR and also when we plug in our services as oracles in tokenization networks, for validation of calculations or receivables management, regardless of our securitizer’s participation in the transaction.”

Grupo Travessia also adopted caution and investment in a company as strategies. “We look carefully at the tokenization issue, but it’s still in its infancy. It will be important not to issue the token, but to allow everything to be controlled in a tokenized way via blockchain,” comments Stopa, adding that the securitizer, like OPEA, made an investment in a tokenizer, seed capital, to follow the development.

Overall, the securitization companies are optimistic about the future despite the regulatory changes, as they believe there are still ample opportunities in the market. They emphasize the importance of adapting to new regulations and leveraging technology to enhance their operations and risk management processes.


Shopping centers REITs accumulate US$ 500 million in acquisitions this year

Mar 22, 2024

After a busy 2023 marked by acquisitions, 2024 promises to repeat the dose, especially in the Mall REITs segment. Between January and March this year, mall acquisitions by funds already total US$ 500 million (R$ 2.5 billion), considering the acquisition of the SYN portfolio by XP Mall, according to a survey by Genial Investimentos managers. Among the major buyers are the XPML11 fund from XP and the MALL11 fund from Genial.

The basket of shopping mall funds stood out in 2023 compared to other brick funds categories, such as corporate or logistics floors, which has generated significant results. The return to historical occupancy levels, a decrease in default rates, and the end of the discount season on rents, and consequently, a considerable increase in income, have been important factors in the recovery. All this, combined with the discount level on the stock exchange shares that the funds experienced 12 months ago. “This promoted outstanding sector performance,” says Caio Nabuco de Araújo, an analyst at Empiricus Research.

“With this, the funds were able to anticipate some raises, especially at the beginning of the domestic interest rate decline. We’ve already seen shopping centers issuing new quotas, raising funds, intensifying this scenario of mergers and acquisitions in the sector, something that we see as quite significant in recent months,” analyzes Araújo.

More cash inflow

According to Rodrigo Selles, manager of Genial Malls, the market has noticed these movements and the trend of shopping malls’ recovery, which has had a positive impact, especially on the most important funds. “The MALL11 itself made a US$ 94 million (R$ 470 million) offer at the end of last year, beginning of this year, broken into two settlement windows, but other funds also raised a lot,” comments Selles.

XP Mall conducted a public offer in February, raising US$ 200 million (R$ 1 billion). The Capitânia Shoppings fund, with just over a year of existence, raised US$ 64 million (R$ 320 million) to pay obligations of existing properties in its portfolio. Another fund that went to the market to raise funds was HSI Malls, which raised US$ 87.5 million (R$ 437.5 million) with its third issue. BTG Mall, from BTG Pactual, announced a new quota issuance plan, with the intention of raising around US$ 124.8 million (R$ 623.8 million), but did not specify which acquisitions would be made with the resources.

“What explains the sector’s movement is partly about what’s happening in the ‘micro’, with the shopping industry, with assets, and obviously the macro issue, which affects the entire industry, due to the expectation of lower interest rates in Brazil and the United States,” comments Selles. For the manager, the asset is in a good moment of growth, retail, public, consumption, etc., in addition to the expectation that, at the end of the year, interest rates in Brazil will reach 9% or 9.5%.

“And when we talk about real estate funds, there is a very strong correlation with these macro aspects. With these two combined effects, one macro and one ‘micro’, we had this very strong movement at the end of last year, and also this year. At the beginning of this year, there are already some offers being announced,” he adds.

“If we bring this number (US$ 500 million or R$ 2.5 billion in acquisitions this year) to 2023, of course, it is a considerably larger amount because the funds started making new issues since mid-2023. So, a large part of the properties has already been acquired last year itself, and it is a volume that we see continuing throughout 2024,” analyzes Araújo, from Empiricus.

According to Maria Fernanda Violatti, head of listed funds at XP, this shows that there is an expectation that the segment will be one of the largest fronts within the offers of 2024.

Among the main buyers, the first to stand out is XP MALLS, which announced less than 30 days ago the acquisition of a stake in the SYN’s portfolio of properties and shopping malls. “This brought the XP MALLS’ acquisition movement to over US$ 400 million (R$ 2 billion), let’s say, in the last 12 months,” comments Araújo, from Empiricus.

In second place, with a smaller acquisition volume of US$ 55.5 million (R$ 277.3 million), Genial Malls also stands out. Rafael Vasconcelos, manager of MALL11, comments that all the fund’s acquisitions have already been completed. Among this year’s purchases are 20% of Shopping Metropolitano, 17.5% of Caxias Shopping, and 100% of Barra Malls FII’s shares, the owner of Península Open Mall and Rio 2 Shopping.

“We had a good part of the acquisitions in Rio de Janeiro. First, it was Shopping Metropolitano, which is a shopping mall with huge growth potential today. When we look at our portfolio, I would say that this is one of the main assets with growth potential. It is located in an expanding area of the city, Barra da Tijuca, where you will have population growth, and it is still a developing region. It is currently a super interesting profitability with huge growth potential,” says Vasconcelos.

Investment trends

Drawing a profile of the regions from 2023 to the present, the ‘target regions’ of real estate funds were the South and Southeast, which represented, according to Empiricus’ survey, about 75% of shopping centers acquisitions, covering this window of 15 to 16 months. According to Araújo, São Paulo enters as a region of greater focus, with about 30% of acquisitions, considering this database.

Maria Fernanda also mentions the increased demand for the two regions. “It is an expectation that managers seek much more, at this first moment, in these more consolidated regions, São Paulo and Rio de Janeiro states. A very important point is that the movements are also associated with the recycling of listed companies. They recycle the shopping mall, and it turns out that, at the opportune moment when real estate funds have a good possibility of raising funds, they can then acquire several of them that are on the market,” comments the XP’s fund head.

For MALL11’s managers, this trend is a reflection of GDP concentration. According to them, Brazil’s consumption is somewhat concentrated in the Southeast, so there are more shopping malls in this region, and it is natural for shopping FIIs to also have a more concentrated portfolio.

“When we take HGBS, for example, it is clearly a fund focused on the state of São Paulo. Now Vinci’s Shopping REIT is a fund that does not have a clear focus on a specific state, on the contrary, it may be the one with the greatest geographical presence in Brazil,” comments Vasconcelos, MALL11’s manager. “XP’s also intends to focus more on the Southeast, from what we have seen in the portfolio. We have this proposal, a little different from HGBS and Vinci’s fund, as I see it. We are entering the South now, but we have a greater focus on the Southeast (with almost 50% concentrated in the state of Rio de Janeiro) and even a little in the Brazilian Northeast, and I think we are a little more agnostic in that sense,” he concludes.

Vasconcelos mentions that the managers study the operation and understand what makes sense, and if the asset’s characteristics fit the portfolio, they proceed with the transaction.

“For example, we are going to acquire a shopping mall in Feira de Santana, interior of Bahia. When you look at the characteristics of the city, 700 thousand inhabitants, it is the only shopping mall in the region, Feira is one of the main cities in the Northeast, has N factors, and we see that it makes complete sense to make a transaction in this place, and the shopping mall is doing very well,” he analyzes.

“What we do is fit, look at the asset, analyze, understand how it is positioned in the city today, in the market where it is inserted. We know that the real estate market is a micro thing, it’s regional, so it’s no use looking at one characteristic and not understanding the city where it is positioned.”


Asset manager has plans to operate with managed portfolios and is looking for a partner in the market

Mar 22, 2024

As an independent manager specialized in structured funds, ID Asset Management (IDGR) looks more like a “corporate banking,” in the words of one of the partners and investment director, Gustavo Biava. And that’s exactly how it is, serving institutional clients, that ID aims to continue its growth process. Last year, with the structuring of funds – REITs, FIDCs (Fund of Investment in Receivables), and FIPs (Private Equity Funds) – and the management of products for third parties, ID doubled its assets under management to US$ 1 billion (R$ 5 billion). The company also administers an additional US$ 240 million (R$ 1.2 billion) in third-party funds. The current work aims to maintain the pace of growth, which means reaching US$ 2 billion (R$ 10 billion) by the end of the year. In an interview with Capital Aberto, Gustavo Biava shares the plans to achieve this ambitious goal.

Founded in 2019, ID focuses on so-called structured, illiquid products, offering them to institutional clients such as family offices, banks, assets, economic groups, and foreign investors. This essence, as Biava emphasizes, will continue. “We will remain in this same strategy. We have some retail clients in REITs listed on the stock exchange, but it’s not the central idea,” he explains. ID has five real estate investment trusts (REITs), three already listed on B3 and the other two in the process of listing. “We never focused on retail, and we only listed them because it was a condition of large investors seeking liquidity.”

Retail Fund of Investment in Receivables, not yet

The same goes for FIDCs, which provide direct credit to business chains, such as agribusiness or retail, with goods or crops given as collateral. The possibility of offering the product to retail investors, now possible with CVM (Exchange Commission of Brazil) 175, does not excite ID, at least not for now. “We have an FIC of FIDC, which buys quotas from other FIDCs, open. It only buys senior quotas, which have a minimum of 30% subordination. We thought about putting it on the shelf, but today, brokerages are not prepared to sell FIDC to retail investors; we’ll wait.”

Fipe with REIT DNA

ID has a portfolio of 30 investment funds in shares, half of which are internally originated, and the other half for which it provides administrative services to other managers. Many of ID’s FIPs are equity, explains Biava, meaning they are constituted by families seeking to improve asset governance with a view to a future sale, for example.

One of the novelties is an FIP set up in partnership with BR Angels, a venture capital firm, which raised US$ 3 million (R$ 15 million) from 93 investors. The product has already made its first two acquisitions. Another, in the study phase, is an Fipe to purchase a solar plant, to own the asset like an REIT. “In this case, we would rent out the facility to those participating in energy supply auctions. In the REIT, we would receive a rent that is not taxed, with a tax benefit.”

Separation of activities

Recently, ID acquired a smaller management company as part of its strategy to segregate operations. Once approved by regulators, there will be two companies – IDGR, which will focus solely on FIPs, and GRID, which will be responsible for REITs, FIDCs, and will provide services to other managers. “This preserves the company, separating activities that should indeed be segregated.”

At GRID, there will also be a new area of operation, managed portfolios. Currently, ID is looking for a partner to operate in the segment, which, in Gustavo Biava’s view, will grow significantly with the change in taxation of closed-end funds. “With the new rules, it no longer makes sense to pay the entire structure of a fund to manage smaller amounts, say US$ 1 million (R$ 5 million). There is already a flow of resources into managed portfolios,” he comments. “As we don’t have expertise in the area, we are currently looking for a partner.”

Internationalization on the horizon

ID’s project to open a unit in the United States is already underway. “In Brazil, we represent non-resident investors, authorized by the Central Bank. Within the management company, we have almost US$ 200 million (R$ 1 billion) from foreign investors. In the United States, we want to represent American investors and also present investment opportunities for Brazilians in the United States. So we will make this exchange.” In the bureaucratic arrangement phase, the office is expected to open in early 2025.

The optimism about the projected growth for the year, says the partner, comes from two sources. “We have internal operations being originated and also negotiations with funds to migrate here, which significantly accelerates growth.” And he adds, “There has been a lot of regulatory change, with many smaller managers looking for a way out. Today, we practically make very little commercial effort, but opportunities always arise.”


Brazil remains in the uncomfortable position of having the second-highest real interest rate in the world

Mar 21, 2024

The Monetary Policy Committee (Copom) of the Brazilian Central Bank once again reduced the basic interest rate by half a percentage point, maintaining the pace of previous meetings. With the Selic at 10.75% per year, the real interest rate – nominal minus inflation – stands at 5.90% projected for the next 12 months. It is the world’s second-highest real interest rate, trailing only Mexico, with 7.46% per year, according to a survey by MoneYou.

In the statement, the committee stated that the external environment “remains volatile, marked by debates about the start of monetary policy easing in major economies and the speed at which sustained inflation declines will be observed in various countries.” Regarding the domestic scenario, Copom states that the set of economic activity indicators “remains consistent with the scenario of economic slowdown.”

According to economist and partner at Matriz Capital, Vinicius Moura, the highlight of the statement is the fact that they mention expecting another interest rate cut at the “next meeting” in the singular, not in the plural. “This leaves a climate of uncertainty about what may happen at the upcoming meetings. But I also think it could just be a way to communicate that the government maintains its fiscal goals. I do think there is room for cuts of the same magnitude.”

The statement shows that there is a process of disinflation underway, with consumer inflation on a downward trajectory and inflation expectations for 2024 and 2025 hovering around 3.8% and 3.5%, respectively. In Moura’s view, this fuels confidence that “we are on the right path to achieving a more stable and predictable economic environment.”


Bradesco Asset outlines scenario for multi-market funds 

Mar 20, 2024

After disappointment with US monetary policy and maintaining high interest rates, Bradesco Asset sees something positive on the horizon. For the asset manager, the pessimism that weighed on asset behavior in the first two months has already been priced in. In a decisive week for global monetary policy, with meetings of the FED, Copom (Brazil’s Monetary Policy Committee), BOJ (Japan), and the Bank of England, among others, the asset has outlined a scenario with challenges for macro multi-market funds and highlighted the strategy