Brazil’s multi-asset exchange suffering

Brazil’s imposition of a 2 per cent tax on money entering the country to invest in equities and fixed income instruments last week has put the BM&FBovespa, the country’s multi-asset exchange, “under friendly fire”, according to Edemir Pinto, chief executive.

Executives at the exchange are concerned that the tax, applied since last Tuesday, will encourage investors to trade Brazilian assets on other exchanges rather than in São Paulo. Most of Brazil’s large cap companies have shares traded in New York in the form of American Depository Receipts (ADRs).

Brazil’s main equity index lost 2.9 per cent on the day following the announcement. The BM&FBovespa’s own shares lost 8.4 per cent.

“A third of our volume is from foreign investors and they are quickly re-doing their sums,” Mr Pinto told FT Trading Room. “Most blue chips have ADRs in New York where they won’t pay anything and where the rules are clear and lasting.”

Some analysts criticised the tax last week for undermining a reputation for clear and reliable rules in Brazil built up over the past decade and a half, although others pointed out that Brazil has used short-term capital controls in the recent past.

Mr Pinto said he was concerned that the tax could interrupt a return to equity issuance in Brazil this year. In June, VisaNet, the Brazilian arm of Visa Inc, the credit card network, raised $4.3bn, Brazil’s biggest ever initial public offering. It was topped last month when Santander, the Spanish bank, sold 14 per cent of its Brazilian operation for $8bn.

“We were on a fantastic growth path with the promise of a spectacular first half next year,” Mr Pinto said. “We didn’t expect the government to take such a drastic measure.”

Last year the government imposed a 1.5 per cent tax on foreign investments in fixed income instruments. It was intended, like last week’s tax, to slow the steady appreciation of Brazil’s currency, the real, and to reduce exchange rate volatility and was lifted following the onset of the global financial crisis. In both cases the effect on the exchange rate was short-lived. Last week the real lost ground briefly against the US dollar before resuming its upward course.

The real has appreciated steadily as foreigners have been drawn to Brazil either to invest in the real economy or to buy securities. The flow of money to equities has been particularly strong this year. In the eight months to the end of August, net inflows to equities were $13.2bn (with gross inflows of $89.1bn); net inflows to fixed income instruments were $2.5bn (with gross inflows of $27.3bn). Foreign direct investment in the period was $15.9bn.

Equities in São Paulo have gained more than 140 per cent this year in dollar terms and the 2 per cent tax is unlikely to deter any but the most short-term investors. But deterring short-term investors will reduce liquidity on the exchange, undermining one of its main attractions.

Because Brazil’s capital markets are much bigger and more liquid than they used to be, foreigners were able to sell assets there during the onset of the global crisis to cover losses elsewhere. As investor appetite for risk has recovered, Brazil has been one of the world’s first and biggest beneficiaries.

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