The number of listed companies is the same as 15 years ago, and equity offerings have hit their lowest volume in eight years. Reasons: inflation, high interest rates, and fiscal risk.
Juliana Machado
At the beginning of the year, many analysts predicted that 2024 would be a turning point for the Brazilian stock market, with the return of IPOs, a significant surge in the Ibovespa index, and investors flocking to increase their exposure to equities. Five months later, none of that has materialized. In reality, the market remains frozen. IPOs—initial public offerings—have been nonexistent. The last time the stock exchange hosted such an operation was in September 2021, with the biotechnology and agricultural input company Vittia. For now, there is no sign of a rebound. Between January and April, the financial activity from follow-ons—when publicly traded companies issue additional shares—reached its lowest level since 2016. Meanwhile, the Ibovespa, B3's main index, remains among the worst performers globally.
In terms of listed companies, stagnation has been evident for a decade and a half. There are 333 companies operating with some liquidity, meaning at least one transaction within a year. In 2010, there were 331, according to a study by Elos Ayta Consulting. The survey reveals a surprising fact: there are publicly traded companies with no transactions at all, an undeniable sign of the lack of traction in the Brazilian stock market. But why is it stuck?
Several factors explain the phenomenon, but the primary one is the new inflation and interest rate environment in the post-pandemic world. After global supply chain shocks led to price drops in most countries, the recovery in economic activity triggered an inflationary adjustment. While the pandemic is behind us, its distortions linger: higher inflation driving higher interest rates in major economies, which reduces the attractiveness of riskier assets and redirects investments to fixed income. With depressed stock prices and reduced investor demand, there’s little incentive for companies to enter the market with new offerings.
For now, Jerome Powell, chairman of the U.S. Federal Reserve, has given no indication of when the rate-cutting cycle might begin. "The primary reason for the stock market drought is high U.S. interest rates, which dictate the global cost of money," says Rafael Oliveira, an equity fund manager at Kinea, an investment firm controlled by Itaú. "We don’t foresee a change in this scenario until U.S. interest rates drop."
Brazil's stock market is small compared to its international counterparts. Beyond lagging behind developed markets like the Nasdaq and the New York Stock Exchange in the United States, the Brazilian exchange trails countries such as India, China, Taiwan, Malaysia, Thailand, Russia, Poland, Turkey, and Pakistan in the number of listed companies, according to the World Federation of Exchanges. While quantity doesn’t necessarily mean quality, the numbers highlight Brazil’s challenges in offering diverse options for investors. "Our advice to clients has been: don’t wait for an IPO window; use this moment to finance your operations through other means," says Daniel Wainstein, a partner at Seneca Evercore, a firm specializing in mergers, acquisitions, and restructuring.
Experts also point to Brazil's fiscal imbalance as a key factor keeping companies (and investors) away from the stock market. It’s easy to see why. When government spending increases, so do inflationary risks. To curb rising prices, the inevitable mechanism is higher interest rates, which, in turn, make equities less attractive. Until Brazil resolves this dilemma, the stock market is likely to remain sluggish.
Published in VEJA on May 10, 2024, Issue No. 2892