November 13, 2012 9:03 pm

Equities: Change is in the air for stocks

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Edemir Pinto, CEO of BM&FBovespa stock exchange©AFP

Edemir Pinto: patience

From the moment they are born Brazilians are taught to invest in anything other than equities, says Edemir Pinto, chief executive of the country’s stock exchange operator BM&FBovespa.

“Abroad, when a child is born they are given stocks but here in Brazil we give them a savings account,” he says.

In the United States, for example, companies such as OneShare offer gift cards with stocks in companies such as Disney or McDonald’s. In Brazil, though, few adults, let alone children, venture into the stock market.

It is easy to understand why. Up until a few months ago, Brazil had the highest real interest rate in the Group of 20 Nations according to Bloomberg – a legacy of the country’s past struggle with hyperinflation.

The country’s bond market was one of the most attractive in the world for foreign investors and even savings accounts in Brazil were guaranteed by the government at about 6 per cent.

Meanwhile, the Bovespa stock index has given Brazilians little reason to risk their money on equities, falling about 18 per cent over the past two years.

However, Mr Pinto hopes that is all about to change. Over the past 14 months, Brazil’s government has made lower interest rates a priority in an attempt to spur short-term growth and reform the country’s capital markets.

The central bank has slashed the country’s benchmark Selic interest rate, bringing it down to an all-time low of 7.25 per cent last month. Brazil’s president, Dilma Rousseff, has also helped clear the way for lower borrowing costs by changing the guaranteed returns on savings accounts, which had acted as a floor for the Selic for years.

“For any stock exchange, high interest rates are the biggest competitor you can have so this is a big moment of great transformation for the Brazilian market,” says Mr Pinto. If the Selic remains close to the current low, the positive effects on the Brazilian equities market should be felt within two or three years, he says.

However, there is a great deal both BM&F Bovespa and the authorities can do to speed that process along.

After a series of key governance reforms introduced in 2000 known as the Novo Mercado (New Market) helped boost confidence in Brazilian stocks, the emphasis is now on bringing more companies and investors to the market.

Brazil’s national development bank, BNDES, recently signed an agreement with BM&FBovespa to list several of the smaller companies it has invested in – an initiative which could lead to up to 10 more initial public offerings before the middle of next year, says Mr Pinto.

BM&F Bovespa has been trying to change Brazilians’ long-held aversion to stocks by running beginners’ courses online and across the country on how to invest in the equities market.

“It’s a process of cultural transformation and it’s going to take some time,” says Mr Pinto.

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