Brazil’s stock exchange: A second look
WHEN Luiz Inácio Lula da Silva led Brazilian workers in a demonstration in front of the São Paulo stock exchange a decade ago, angry exchange members marched into the street to confront the fiery union leader. Three months into Lula’s second term as president, though, financial leaders admit their early fears were overblown. “Surprisingly, we have never had a government so committed to the capital markets as we have right now,” says Gilberto Mifano, chief executive of the exchange.
Just as Lula has won over the traders, so the São Paulo exchange, known as Bovespa, has calmed the doubts of international investors in recent years. Long buffeted by rampant inflation, soaring interest rates and extreme volatility, share prices on Latin America’s largest stockmarket have doubled in the past three years, according to the leading market index. As an expression of confidence in the future, members will vote on a plan to float the exchange itself later this year.
If it does offer itself to the public, Bovespa will have some impressive numbers to tout. Market capitalisation rose by 37% in 2006, to 1.54 trillion reais ($723 billion). Initial public offerings (IPOs), non-existent for years, began to rise in 2004 and jumped to 26 last year, more than any other emerging-market exchange except Shanghai and Hong Kong. In the first two months of this year, Bovespa surpassed Hong Kong in total capital raised.
What lies behind these figures? Despite the anti-business vitriol of Latin American leaders like Venezuela’s Hugo Chávez, foreign investors are learning to distinguish Brazil from its more radical neighbours. Foreigners now account for about 35% of trading on Bovespa, up from 25% two years ago. They snapped up 75% of recent IPOs.
Outside investors have benefited as the grip of insiders has loosened. After a rocky start, a new market launched in 2000—the Novo Mercado—has led to greater shareholder democracy, ending an era of old-style corporate governance in which investors with small financial stakes monopolised voting rights in companies.
The economy is in better shape too, thanks to tamer inflation and lower interest rates. A country prone to sharp devaluations of the currency must now cope with the real’s strength: it has gained about 4.2% against the dollar this year.
During the turbulent 1990s, Brazilian firms sought to float on exchanges abroad, calculating that a foreign listing would give them access to deeper pools of money and an implicit stamp of approval in the eyes of investors. Despite Brazil’s progress since then, many big firms still feel the need to list elsewhere. Mr Mifano jokes that the New York Stock Exchange is Brazil’s second biggest market, with 32 Brazilian firms listed. In 2002 Brazil’s Congress voted to amend the constitution to exempt share trades from a widespread tax on transactions. This has helped Bovespa lure back some of the trades it lost as Brazilian companies listed abroad. But “liquidity is very easy to lose and not so easy to recover,” notes Mr Mifano.
Brazil’s exchange must also overcome scepticism on the buyer’s side of the market. Individual Brazilians lack an equity culture. The vast majority, hobbled by poverty, will never own stocks, but many others with the means to do so also remain wary. They remember the days when the exchange had a reputation as a casino for the elite. Mr Mifano is eager to attract middle-class investors, but realistic about the difficulties. “As Brazilians, we forgot how and why to invest in equities,” he says.
Article source: http://www.economist.com/node/8968387?fsrc=rss