Brazil grinds out a result
The South Americans are dominating possession. And it’s not only on the football pitch.
Net flows at Brazilian equity mutual funds have been positive for 11 out of the 12 months to end-May, according to estimates from Lipper, leading to total net inflows over the period of about $13 billion. That stands in stark contrast to the other three BRIC emerging market powerhouses.
China equity funds have waved goodbye to almost £3 billion in that time, Russia a similar amount and India $4 billion. India equity funds have seen 12 straight months of net outflows, Russia 10 out of 12 and China nine out of 12. The graphic below makes the trend clear, with Brazil the only BRIC to show net inflows to equity funds in eight of the 12 months examined. (A brief note on India: the reporting timetable of locally-domiciled funds means that these numbers are largely from funds based outside the country, which account for about half of assets)
It looks like a huge bet on Brazil just as persistent protests over corruption and public services bring on some big match nerves. The cost of insuring Brazilian debt through credit default swaps (CDS) hit 20 month highs last week at 204 basis points, according to Markit.
The net inflows have also come during a year when the stock market has underperformed broader emerging markets on the prospect of inflation and fears of government intervention in the private sector (see the graphic below). That would give the investors who have piled in little chance of a profitable exit while they watch running battles in the street and read about hikes in inflation predictions and cuts to GDP forecasts.
It all looks a bit odd, but you can put the result down to home advantage.
The few Brazil equity funds which are not domiciled locally — accounting for just 3 percent or so of the $140 billion in total assets under management — have seen the kind of net outflows you might expect.
The bulk, based in either Luxembourg or Japan, saw withdrawals of $500 million in the 12 months to end-May, which equates to about 9 percent of the assets they hold. You can get a further glimpse of international sentiment by looking at the Global Emerging Market Equity funds which have the freedom to invest broadly across the sector. Looking at allocations data published in the three months to end-May, the average holding in Brazil has fallen to 12.1 percent of a portfolio from 13.8 in 2012, according to data from Lipper.
Domestic bias offers a comforting floor for markets, of course — local investors always tend to send a good portion of their money into companies they know and products they use — and Brazil looks like an extreme case. But there are signs the market won’t be able to rely on that floor remaining quite so high as Brazilian investors show signs of broadening horizons, at least among the bigger players.