Capital Markets in Brazil

Capital Markets in Brazil 

Since early 2000s, the Brazilian capital markets have developed considerably, undergoing constant and significant reforms in the regulatory framework to simplify rules, promote higher standards of efficiency and corporate governance, expedite the offering registration process, and reduce registration costs.

The Brazilian equity capital markets is supervised by the Brazilian Securities and Exchange Commission (CVM), which is also responsible to regulate over and supervise public companies, underwriters, investment funds and other market participants, the National Monetary Council (CMN) and the Brazilian Association of Financial and Capital Market Entities (ANBIMA). In addition, companies wishing to access the markets must also comply with enhanced corporate governance requirements and listing rules of the B3 S.A. – Brasil, Bolsa, Balcão (B3), the only Brazilian registered stock exchange.

The improvement of the overall conjuncture of the Brazilian capital markets has strengthened the confidence of the investors and has attracted many new investors over the years, ranking at similar levels of high-profile global markets. Another recent remark is the higher liquidity in Brazilian capital markets, which increases the appetite of the investors.

Recently, the CVM issued a new resolution to come into effect on 2 January 2023, unifying the Brazilian regulatory framework for public offerings of securities in Brazil and revoking several previous instructions and deliberations on the subject. Such resolution eliminates the division between registered public offerings and those exempted from registration, when carried out with restricted placement efforts. From 2023 onwards, all public offerings aimed at investors in Brazil must be registered with the CVM, and subject, depending on the characteristics of the public offering, to automatic or ordinary registration process.

Additionally, the resolution provides a safe harbour for public offerings of securities issued and traded in organised foreign markets which are settled abroad and denominated in foreign currency. To the extent such international offerings are not targeted towards investors in general in Brazil and do not violate the limits of acts considered as acts of public distribution in Brazil, they are now expressly exempted from registration with the CVM.

The year 2022 in review 

Historically, the markets are highly volatile in the months preceding the presidential elections, which makes issuers and investors very cautious in their decision-making. In 2022 in particular, the uncertainty in the market was increased by the unfolding of the conflict in Ukraine, associated with the downturn of the COVID-19 pandemic and continuing lockdown in China. Despite 2022 ending without an IPO, the year was marked by 18 follow-ons, which totalled R$57 billion, including Eletrobras privatisation totalling R$31 billion.

On 30 October 2022, former president Luis Inácio Lula da Silva (Lula) was elected as Brazil’s next president. Lula will be sworn in on 1 January 2023, for his third time, after beating the incumbent president Jair Messias Bolsonaro (Bolsonaro) by the smallest margin ever in a Brazilian presidential election (50.9% to 49.1%).

President Lula’s team has started providing glimpses into what his future cabinet will look like. His economic team is expected to include well-known economists with successful track records in fostering economic growth and monetary stability, which may help ease tensions in the market. In November, right after the elections, Sendas Distribuidora (Assaí) raised R$2.7 billion in its secondary follow-on. The financial markets received the offering as a good signal, since demand exceeded supply.

A look ahead 

After a sluggish year for IPOs, investment banks project that capital markets will accelerate again in the first quarter of 2023, considering companies often resume plans to raise money in the Brazilian stock market after the elections.

In the next year, IPOs and follow-ons are expected to be larger than the ones seen in the period from 2020 to 2022, with an average ticket between R$2 billion and R$4 billion, and market experts expect IPOs to raise R$60 billion to R$70 billion. Investment banks estimate 25 to 35 IPOs and follow-ons and see real economy businesses, especially those in energy, oil and gas, and basic sanitation, as candidates for financing through the stock exchange. On the other hand, technology companies will take a little longer to resume the levels seen before the tech crisis.

Brazil also stands to receive greater investment due to investors increasingly seeking to replace off-shoring in other emerging economies, selecting politically aligned or neutral partners to do business with. There is also an expectation of a shift in Brazil’s environmental policies towards preservation, which may attract ESG-conscious investors.

According to the Organisation for Economic Co-operation and Development (OECD), Brazil was the third largest recipient of foreign direct investment in the first half of 2022, behind the United States and China only. Compared to other markets, the macroeconomic picture for Brazil in 2023 is relatively positive. Lula will be inheriting an economy that has begun to recover from the COVID-19 pandemic and which is expected to grow by 2.8% in 2022 according to the International Monetary Fund (IMF). This is a growth superior to several other emerging countries and in 2022 inflation has been relatively under control when compared to all the G20 countries between January and September.

Finally, it is important to point out it is still too early to have a sense of how the markets will actually respond to all of the uncertainties of the year 2023. However, we have optimistic views and thoroughly believe there is a solid demand of companies, investment funds and other market agents to access the Brazilian equity capital markets. Hence, any improvement in the economic and political conjuncture might have positive effects in the markets overall.