Foreigners Tighten Hold on Brazil Stocks as Locals Sit Out Rally

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(Bloomberg) — The surge in foreign inflows into Brazilian equities is set to extend for the rest of the year amid revived risk appetite across global markets, according to top banking executives.

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Overseas investors have poured nearly 65 billion reais ($13.1 billion) into Brazilian stocks as of April 20, already exceeding the combined total for 2024 and 2025. The surge in external flows has helped the nation’s benchmark Ibovespa index hit successive record highs, outperforming both the MSCI Emerging Market equities gauge and the S&P 500 by wide margins.

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“The trend points to a continued significant inflow of foreign capital into the Brazilian stock market,” said Guilherme Silveira, head of equities at Banco Santander’s unit in the country. “Emerging markets remain on investors’ radar, and Brazil stands out as a key beneficiary of these flows.”

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The first quarter marked the strongest start to a year for foreign inflows since 2022 as investors diversify away from US assets into developing markets. Brazil’s high liquidity, expectations of falling interest rates and hopes for market-friendly policies after October’s presidential election — as well as its distance from the Middle East conflict and its position as a net energy exporter — have made it a top choice.

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Local investors, meanwhile, have remained on the sidelines. Stung by double-digit rates that have fueled persistent outflows into fixed income products, domestic institutional and retail investors cut their equity allocations to historic lows, according to data compiled by exchange operator B3 SA. The share of foreign investors in the Brazilian stock market has climbed to a record 62%, the data show. 

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The central bank’s monetary easing cycle could start to drive locals back into stocks. Policymakers lowered the benchmark Selic rate by 25 basis points last month. 

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“History tells you that when rates start coming down, then the flows reverse,” said Ben Laidler, Bradesco BBI’s head of equity strategy. “Either because the locals have to play catch up at some point as it becomes too painful or rates come down enough that money stops going to fixed income.”

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Still, market jitters remain while there’s no resolution to the war in the Middle East. The oil shock led many traders to trim bets of a larger easing cycle and now see the central bank lowering the Selic by about 225 basis points in total, from expectations of 300 basis points seen at the end of February. 

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Brazil investors will also have to contend with upcoming presidential elections. Flávio Bolsonaro is tied with President Luiz Inácio Lula da Silva in the run-up to October’s vote, but with a close race expected until the very end, markets are not trading elections right now, said Marcelo Okura, co-head of global markets for Latin America at UBS Group AG.

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For now, foreign investors will continue putting money into Brazilian stocks, he said, adding that markets can move even further on indications the tensions in the Middle East might come to an end. 

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“Brazil can stand out as an investment alternative as it is geographically distant from the war, a commodity exporter with a liquid market and relatively stable institutions,” Okura said. “The only caveat would be if we enter a very deep global crisis and a widespread flight to safe-haven assets.”

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