Brazil's equity fund managers are looking towards potential interest rate cuts in 2026 to reverse a disastrous year of record-breaking withdrawals by local investors, a trend that persisted even as foreign capital pushed the country's main stock index to historic highs.
Record Outflows Defy Market Rally
In a stark paradox, Brazil's active equity funds witnessed an unprecedented annual outflow of 54.5 billion reais in 2025, according to data from the Brazilian Capital Markets Association, Anbima. This massive withdrawal shattered the previous year's figure of 16.2 billion reais, which occurred during a period when the benchmark Ibovespa index fell by 10%.
The exodus was most severe in the first half of the year, accounting for 41.2 billion reais of the total. Although the pace of withdrawals slowed in the latter months, the trend continued unabated. Notably, major institutional players, including some of Brazil's largest pension funds, maintained their equity allocations at historically low levels.
The Foreign Investor Surge and the Local Dilemma
This domestic retreat happened against the backdrop of a powerful 34% rally in the Ibovespa in 2025. The surge was fueled largely by global investors shifting capital away from the United States and into developing economies like Brazil. Expectations of a weaker US dollar and potential rate cuts by the US Federal Reserve boosted appetite for emerging markets globally, with the MSCI Emerging-Markets Index climbing 31% last year.
Data from stock exchange operator B3 SA confirms this foreign influx, showing that overseas investors purchased 25.4 billion reais of Brazilian stocks in 2025. This marked a dramatic reversal from 2024, which saw net foreign outflows of 32.1 billion reais.
For Brazilian investors, however, the calculus was different. Benchmark interest rates near a two-decade high of 15% made fixed-income investments far more attractive. Rafael Oliveira, an equity manager at Kinea Investimentos, pointed out that a range of tax-exempt investment products also compete fiercely with equities for domestic capital.
"The money is not going into risky assets in Brazil," Oliveira stated. He added that despite the stock market delivering returns roughly 2.5 times those of fixed income, local investors are not feeling the 'Fear Of Missing Out' (FOMO) because they are content with their current risk-adjusted returns.
Hope Rests on a Shift in Monetary Policy
The primary hope for a revival in local participation now hinges on the central bank's interest rate policy. Analysts believe that lower rates would erode the appeal of fixed income and tip the scales back in favour of equities.
"If we see any signs of interest rate easing going forward, 2026 could indeed be an excellent year for risk assets as a whole," said Clara Sodré, a fund analyst at XP Inc. in Sao Paulo. She believes this could lead locals to start increasing their exposure to stocks.
Rafael Oliveira echoed this sentiment, suggesting that steady foreign investment, which continues to support market returns, would provide an additional incentive for domestic investors to re-enter the market once conditions change.
For those who remained invested through the volatility, the patience paid off. Florian Bartunek, CIO and co-founder of Constellation Asset Management, noted that the investors who stayed are those with appropriate allocations and the fortitude to withstand market swings. "Our message is: endure the volatility — it’s worth it," he advised.
As 2026 unfolds, the Brazilian equity market presents a tale of two investors: confident foreigners and cautious locals. The bridge between them may well be built by the country's central bank and its decisions on the path of interest rates.
