Latin connection: Investors keen on Brazil

A surge of foreign investment has forced the Brazilian authorities to take action to prevent a bubble developing. So, does Brazil remain a land of opportunities?

Ostensibly, the decision by Brazil on October 20, 2009 to set a 2% tax on fresh capital inflows investing in equities and bonds had exactly the impact people will have expected. Once, such an event would have undoubtedly caused a mass exodus of investment from the country, but although the knee-jerk reaction was to sell anything denominated in Brazilian real, the dust soon settled.

It would seem that the international investment community believes that the country’s growth story is one built on strong foundations. The fact that Brazil decided to take such a measure, which was designed primarily to slow the appreciation of the real against the globally weak US dollar, is a solid illustration of just how far the country’s economy has emerged.

The new tax may have slowed down foreign investment, but it did not cause an exodus. Brazil still saw a net inflow of around $500 million into its equity markets in October, strongly supporting the now common claim that the country is really starting to capitalize on its undoubted potential. As Cathy Lyall, an independent exchanges consultant who is currently working for BM&BOVESPA, points out, Brazil is the fifth largest country in the world and it has an extremely large and strong agrarian country.

Such a fact would always have attracted some niche investors. But wholesale changes to the country’s investment rules & regulations, as well as to its trading infrastructure, have opened it up to a far wider audience. At a micro level, the creation of BM&FBOVESPA is extremely significant. Formed in 2008 by the merger of Brazilian Mercantile & Futures Exchange (BM&F) and the São Paulo Stock Exchange (Bovespa), BM&FBOVESPA is one of the largest exchange groups in the world. “It’s the fourth largest exchange in the world by market capitalisation, which a lot of people don’t realise,” says Lyall.

As importantly, the technology that the exchange has deployed is becoming seen as one of its strengths. “BM&FBOVESPA is vertically integrated, multi-asset exchange. It has built is technology from the ground up and it provides a centralised exchange for multiple assets with robust clearing and settlement. Its infrastructure allows regulators to know who the beneficial owner of every transaction is.” Few would disagree that this has proved important as a means of installing faith in the country’s markets.

Brazil has been wary about opening up its markets too quickly. In particular, foreign banks and brokers have not been able to fully write to BM&FBOVESPA’s post-trade systems, which has perhaps limited their control of risk. The country’s regulators have insisted that foreign firms need to operate under their jurisdictions, but at the same time has made it clear that foreign-owned subsidiaries are more than welcome to establish a local presence. This is seen not just as a way of retaining control for its own sake, but as another important policy to help maintain the confidence both foreign and domestic investors now have in its markets. As part of this approach, Brazil is fully encouraging foreign ISVs, such as SunGard global trading business, to provide richer connectivity.

“Brazil had the opportunity to completely restructure its markets from both a regulatory and technological perspective. It basically ripped everything out and started again, doing things properly,” says Lyall. “Even if the world hadn’t changed over the past decade, Brazil still would have been a good story. But the way it has gone about restructuring its markets means that it has become the potential hub for all investments into Latin America. The easiest way to access Brazil, for both investors and ISVs, is to work with local firms. That is already happening and Brazil is now introducing the same sort of services seen in the mature markets. For instance, colocation went live for derivatives in July and is expected to go live for equities by the end of 2009. This will increase the interest from the high-frequency trading community and add to its attractions,” she adds.

Importantly, the exchange has been steadily allowing ISVs to write to its systems. SunGard’s global trading business has provided access to Brazil’s markets for over a decade and it now has 29 clients, as well as a further 10 GL Net order-collector brokers who will be keen to cater further for the demands of a growing international investor base.

More information on SunGard 's global trading business at: www.sungard.com/globaltrading