Opinion – Marcos de Vasconcellos: Brazilian banks are going against the grain of the global giants (thankfully!)

The market’s logic is clear: when interest rates are raised, banks win. Owners of the money will charge more for loans and earn more along the way. But the reality is here to defy simple reasoning, pulling down major US banks just as the country raised interest rates for the first time since 2018.

For anyone returning from a stint on Jupiter, we have a war in Ukraine and a lethal virus pandemic underway, logically impacting the global economy in 2022, accelerating inflation and disrupting its control.

The S&P 500, the world’s leading stock market indicator, is down about 8% this year alone. The Dow Jones US Banks index (which gathers 57 financial institutions from the US and Canada) fell by more than 13% in the period.

Major global banks cringe at their exposure to Eastern European economies. Since the beginning of the war, these financial institutions have been recording losses and trying to dismantle operations that depended, for example, on Russian capital.

In their balance sheets released last week, Goldman Sachs and Wells Fargo were among those that disappointed analysts, with results below expectations.

The expected economic slowdown in the US brings with it the prospect of fewer loans and financing, impacting the sector’s multiples, as recalls Leonardo Cardoso, strategist at Brazen Capital, an international investment manager.

So, while the US central bank (Federal Reserve, or Fed) raises interest rates in the largest economy on the planet, its banks suffer.

But here in Brazil, where you probably invest most, if not all, of your resources, the story is different and goes against the grain of the global giants.

This is also a bit new. Despite our gigantic dimensions (territorial and economic), Brazil represents less than 1% of the world capital market. As a result, our behavior is usually that of a small cap (companies with lower market value and liquidity, whose shares are highly volatile).

Traditionally, when the global market crashes, ours sinks. When it goes up, we fly. But that is not what is happening.

The search for commodities (our strength) and the demand for emerging markets from those who want to take a little risk brought a lot of foreign money to our stock exchange this year. More than BRL 64 billion in the first three months, to be more precise.

This is how our main index, the Ibovespa, rose 11.7% in 2022. And, as large investors do not want to take risks for nothing, their investments in Brazil are going precisely to…. the banks.

The IFNC, an index that brings together the main companies in the financial sector in Brazil (such as Itaú, B3, Bradesco and Banco do Brasil), took off, rising 18.5% since the beginning of January. Other sectoral indices, such as industry, real estate and electric energy, had much worse performances, with variations of -5.5%, 6.7% and 14.8%, respectively.

Thus, although the global market has not followed the traditional logic, the Brazilian who made the “rice and beans” and bet on the banks at the time when interest rates began to rise now reaps the laurels. And there are analysts pointing out that these stocks still have room to rise until the end of the year, with further interest rate hikes on the radar.

Having diversification, including geographic, of your investments is always a good option. But it is important to note how the same variables will impact each market differently, in order to correctly calibrate your portfolio and your exposure to different risks.

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