Some Brazilian bankers have asked whether a large withdrawal would cause psychological damage to retail equity investors. This is important, because retail growth has offset this year’s capital outflows from international investors.
Local banks now dominate the mandate of bookkeeping new transactions because they now control the most important source of demand.
The online brokerage business XP Inc. takes advantage of this to claim led the IPO for BMG banks last year – the first time a new bank won such a role in 17 years.
Not only is there no large-scale redemption, leading Brazilian equity managers are collecting billions of hours. Dynamo, for example, attracts R $ 1 billion ($ 176 million) to Cougar funds in one day.
If a fall in equity prices has led to greater appetite – the B3 stock exchange said 400,000 people had opened accounts in the past two months. Estapar May’s IPO sees 20% of orders coming from the retail investor base.
The main reason why demand for equity has proven so resilient is because the level of income has remained at an unprecedented level.
The Selic national benchmark rate is now 3%, and central bank monetary committee hinted in the minutes of the last meeting that he would cut by 50 or 75 basis points. That will push real interest rates into negative territory.
Company is haven’t taken advantage of this local rate, because when Selic levels go down, the risk of premia has increased. Bankers say this has a psychological impact on the management of the issuing company – exacerbated by the way Brazilian company debt is valued as a percentage of CDI’s overnight interbank lending rate (compounded for this year).
With Selic falling farther and faster than anyone had anticipated, moving to the post-CDI world became urgent
“The yields are still almost the same – say 6%,” said a local DCM banker. “But instead the price became 110% of CDI [with the higher benchmark], now the price is 200% of CDI, and chief financial officers cannot bring themselves to print at that level. “
Some bankers say they have talked to companies about ‘CDI plus spread’, in line with other markets.
This makes sense, and will draw attention to the individual risk component for corporates.
Previously, when the annual CDI was in double digits, the spread of company risk was a small component of the total price so that investors did not pay too much attention or spend time differentiating.
One inheritance from coronavirus pandemic in Brazil there will be greater credit analysis of private companies – which is not a bad thing.
There will be other impacts too.
Private bankers say the CDI benchmark (which is often used in broader industries outside fixed income, such as to measure equity and the performance of local hedge funds, for example) is now unsuitable for this purpose. New benchmarks must be sought.
All of these trends filter the industry before the pandemic, but with Selic falling farther and faster than anyone had anticipated, moving to the post-CDI world becomes urgent.
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