Capital is Apprehensive

This week witnessed a significant outflow of foreign capital from the stock market, estimated at approximately 20 billion reais, despite the positive economic indicators presented by Brazil. The country experienced a challenging quarter, yet it performed better than anticipated. Market expectations for 2024 GDP growth have already been revised upwards from 1.7% to 1.9%. Annual inflation is projected to remain within the target range, around 3.5%, and the Central Bank is expected to continue its interest rate reduction policy. In essence, while the economy may not boom this year, it is poised for better-than-expected performance with a degree of stability.

The market's rationale for this contradictory movement in the Brazilian stock exchange stems from the anticipation that the U.S. will not cut interest rates anytime soon, coupled with concerns about potential “government interventionism” in Brazil. This apprehension is fueled by recent market reactions to the proposed change in Vale's management and Petrobras's decision not to distribute extraordinary dividends.

The concern regarding U.S. interest rates is understandable, given that it represents the world's most secure financial market, attracting risk-averse capital at the slightest sign of instability. However, the renewed discussion surrounding Petrobras's dividends, which reportedly irked the market, is misplaced – here we encounter a false etymology, as 'enfezado' does not mean 'full of feces'.

The rhetorical contortions of press commentators advocating for the primacy of Petrobras's minority shareholders, employing obsolete arguments, are, to say the least, embarrassing.

Short-term focused corporate governance, driven by quarterly results, has weakened market economies by curtailing companies' planning horizons. This model has led to wealth concentration, distortion of corporate management, and increased operational insecurity. Companies have shed well-paying blue-collar jobs in favor of an insatiable cost-cutting culture. The cases of Americanas and Boeing exemplify this effect.

Cognizant of these outcomes, the American business community's Business Roundtable announced its “New Statement on the Purpose of a Corporation.” Its members pledged to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders.

In this new corporate governance model, the pursuit of quarterly profits by shareholders is no longer the primary focus of management. Companies now assume new costs previously borne by society, such as pollution, waste treatment, recycling, and environmental impact.

This shift emerged amidst a growing perception that increasing wealth inequality and the concentration of financial asset ownership lead to distortions in capital allocation. The 2008 global financial crisis and the pandemic exposed capitalism's inability to effectively manage a systemic crisis. Consider, for instance, the widespread paralysis regarding the climate crisis.

Nobel laureates in Economics Joseph Stiglitz and Michael Spence advocate for this model of broad-interest capitalism. According to these economists, it is necessary to 'establish new limits on the pursuit of capital returns, designed to protect citizens (employees, customers, suppliers, future generations)' who lack the means to protect themselves.

The cut in extraordinary dividends is not an isolated incident for the Brazilian oil company. Norway's state-owned Equinor also cut extraordinary dividends and faced criticism for investing in the still-unprofitable renewable energy market.

It remains unclear whether Petrobras ceased distributing extraordinary dividends to invest in the energy transition or if it intends to abandon its current policy of distributing 45% of free cash flow.

It is a fact that the market severely criticized the government's attempt to alter Vale's management, given its minority stake in a private company. Consistently, political interference from Petrobras's minority shareholders, driven by a desire for short-term financial returns, should be rejected.

In the current era, where an omnipresent state fully directing the microeconomy is undesirable, it is imperative that companies, whether private or state-owned, uphold social commitments extending beyond short-term financial gains. Therefore, the fallacy of government intervention in corporations serves merely as a pretext for profit realization, particularly given the substantial appreciation of Petrobras shares over the past 12 months.