After a period of system consolidation following the 2017 merger of Cetip and BM&FBovespa, the Brazilian market infrastructure provider – now known as B3 (Brasil, Bolsa, Balcão) – turned its attention to the delivery of new products and services in 2018. This includes a particular focus on data analytics and tech enhancements aimed at realising increased efficiencies for market participants.

“We are developing new services that better explore our potential around market data and analytics. We have a lot of data and we consider ourselves able to bring more value to everyone in the market in this area,” says Claudio Jacob, managing director, international business development – client relations at B3.

The exchange is also developing new functionalities to support securities lending activities, which are due to launch this year. This comprises the introduction of securities lending services for government bonds, the automation of broker-dealer accounts, and the creation of an electronic securities lending system. Direct access to the buy side, counterparty selection, and automatic renewal of lending assets are among the capabilities offered by the new system.   

Brazil is also moving from a T+3 to T+2 settlement cycle for equities. The Central Bank of Brazil and the Securities and Exchange Commission of Brazil granted B3 the necessary approvals for the transition on May 14 2019. The implementation date for the new settlement cycle is May 27 2019.

While continuing to work on the rollout of new offerings under its comprehensive 2019-2020 Roadmap, B3 has also been celebrating new milestones within the Brazilian stock market. In March 2019, the Ibovespa index, which accounts for 85% of the country’s stock market, hit a new record by surpassing 100,000 points. “Some 3-4 years ago the Ibovespa was running at 50,000 points so it has almost doubled. That’s very impressive, particularly if you consider the fact that inflation in Brazil is higher than in many other countries,” says Jacob. “It also helps to support new IPOs and follow-on offerings.”

As of March 29 2019, there were 336 companies listed on the exchange, with a total market capitalization of more than BRL3,829 billion ($944 billion). The market has also seen growth in average daily traded values for equities, such as a 48.5% year-on-year increase in cash equities to more than BRL16 billion ($3.9 billion) in 1Q19.

Brazil: Economy and politics

Over the last 12 months Brazil has experienced a rather turbulent election, which resulted in a win for far-right presidential candidate Jair Bolsonaro in October 2018. Bolsonaro was sworn into office in January, bringing with him the newly appointed economy minister Paulo Guedes, a former banker. The Bolsonaro administration has promised fiscal reforms and changes to the pension system in a bid to reduce the fiscal deficit and strengthen the Brazilian economy, which emerged from a severe recession in 2017.

In a note published in November 2018, shortly after the election results were announced, Cassiana Fernandez, J.P. Morgan’s chief economist for Brazil, wrote: “While Guedes’ proposed agenda was welcomed by market participants, we remain cautious on the government’s ability and willingness to move forward with the reforms. We believe that at this point there is a 50% chance of approval of a meaningful reform agenda that will be enough to timely address the country’s medium-term fiscal challenges, including the social security reform, which requires a tough-to-get 60% of support in two votes in each house.”

Brazil’s GDP grew by 1.1% in 2018 and April 2019 estimates from the IMF project growth of 2.1% in 2019. However, the country’s economy minister has since revised its growth forecast to below 2% for the year, while minutes from a May 2019 meeting of the Central Bank’s Monetary Policy Committee note that ‘available indicators suggest a relevant probability that the seasonally adjusted Gross Domestic Product (GDP) declined slightly in 2019Q1, when compared to the previous quarter’.

At the time of writing, the Central Bank’s benchmark interest rate (Selic) remains at a record low of 6.5%, a rate that has been held since March 2018. “The low interest rate is bringing about a very interesting change in the behaviour of Brazilian savers, but also institutional investors who are looking at new alternatives in terms of financial instruments in order to maintain the performance of their portfolios,” says B3’s Jacob, who indicates a move towards “more sophisticated” investment vehicles.

Brazil’s investment fund industry – which is estimated to have $1 trillion of assets under management – closed 1Q19 with a net inflow of R$47.8 billion ($11.9 billion), up 3.3% on balances at the end of 2018, according to the Brazilian Association of Financial and Capital Market Entities (Anbima).

“The perception that we have is that Brazilian investors are more optimistic about Brazil, so they are buying more equities and other ‘riskier’ products. Despite the noise around reforms, we feel there is a belief that things are going in the right direction and that foreign investors are due to come to the market,” concludes Jacob.

Learn more: This article features in the Americas Securities Finance Guide 2019, which includes an overview of developments in the region's key markets, insights and analysis from a range of experts, as well as a closer look at the latest trends shaping the securities finance ecosystem. Read the full guide here. You can also find out more about the Brazilian commodities and equities markets, and hear from senior representatives from major exchanges in the region at Trading Brazil on September 10 2019 in Sao Paulo.