Carrying on with our series about Brazil, we turn our focus on one of the most dynamic sectors in recent history: its securities markets. A key merger for Brazil’s financial markets took place last march: the birth of B3 from the fusion of BM&F Bovespa with CETIP.
Over the past few weeks, our office has published some articles that summarize the importance of different industries within Brazil’s agro-industrial complex. In the following piece, we shall present some facts about one of the less heralded, yet dynamic sectors, its securities markets.
Let us start with a brief summary of recent institutional changes within Brazil’s capital markets. In March 2017, BM&F Bovespa (which hosts Brazil’s main centralized securities and derivatives market) and CETIP (the largest OTC market in the country) merged to form a new corporation, B3. In order to better understand its relevance, we need to further analyze the scope of activities in which the previously mentioned companies took part.
BM&F Bovespa was founded in May 2008 as a merger between Bolsa do Mercadorías e Futuros (BM&F), the main derivatives market, and the San Paulo Stock Exchange (Bovespa), the largest securities market in the country. According to the Futures Industry Association (FIA), BM&F Bovespa ranked as the 9th-largest derivatives market in terms of number of contracts traded. According to the World Federation of Exchanges (WFE), BM&F Bovespa’s stock market capitalization had reached USD 758.566 million in 2016, good for 48.3% of Latin American stock exchanges that are included in the WFE.
Cetip was founded in 1984 with the aim of providing deposit, registration and settlement services for the trading of securities in an over-the-counter platform, although trading activity would not start until 1986. After demutualizing in 2008, Cetip broadened its range of services to include collateral management and information services for the auto and real state credits industry.
As we said earlier, these two markets merged in March 2017 in order to create B3 (which stands for Brasil, Bolsa, Balcão) allowing for the realization of economies of scale and scope. A summary of available products is available at http://www.b3.com.br/en_us/products/
Even if Brazil hosts the largest stock and derivatives market in Latin America in absolute terms, its development can be further analyzed with additional statistics. The stock market capitalization to GDP ratio has shown significant growth since 1990. However, once the global recession hit markets near the end of the past decade, this ratio fell below its world average.
Total value traded in terms of GDP is significantly higher in Brazil than in the rest of Latin America and the world. This ratio also fell significantly after going over 38% in 2010, but it still stands over 15 percentage points higher than the world average.
Because of its high activity level, Brazil’s stock market turnover (defined as a ratio between total traded value to market capitalization) is around 75%, also well above its neighbors and the world average.
Brazil’s leading stock market index (IBOVESPA) is mostly composed of financial companies, with banks weighing 29%. Materials industries (steel and iron, chemicals and woods) are tied up in second place with non-durable consumer goods (mostly food and beverages).
Until the end of the past decade, Brazil’s securities market grew dynamically alongside the rest of the economy. The economic recession hit hard and capital markets were no strangers neither to the downturn nor to the global trend for market mergers, giving birth to B3. Foundations are set for sustained growth in market activity if Brazil manages to overcome the current political and economic struggles.