Why we like the volatility of the Brazilian stock market

Dear investors,

This year the Ibovespa started at 161 thousand points, rose to ~199 thousand points in mid-April, and pulled back to ~172 thousand points in the following months. Over that span, there were no major changes in Brazil's macroeconomic scenario. The crisis in the Strait of Hormuz, the most relevant event on the global stage, and the resulting swings in oil prices also fail to explain the magnitude of the price volatility in the Brazilian stock market.

This episode is not an exception in the history of our stock market. Over the past five years, there have been two periods in which the Ibovespa fell more than 20% in under six months, and four periods in which the Ibovespa rose more than 20% over the same span. High volatility is a feature of our market, but it doesn't make it a bad one. By understanding where it comes from and operating with the right strategy, it is possible to generate consistent returns here. Our own track record is an example of this. Ártica Long Term completed 13 years of investing last month, with an average return of 28.5% per year.

High presence of foreign capital

In May 2026, 61% of the total volume of stock purchases and sales on B3 came from foreign investors. These are global funds focused on emerging markets, ETFs that track indices of these markets, hedge funds, sovereign wealth funds, and pension funds. The detail is that, even though they account for most of the volume traded here, Brazil is not a very relevant market for these investors.

Our stock market represents ~0.6% of the global equity market and ~5% of the equity market of emerging countries. We are part of international investors' portfolios from a diversification standpoint or due to occasional macroeconomic theses, but these investors typically do not invest based on detailed analyses of individual companies. They buy the most liquid stocks or choose based on some sector-level direction.

The practical effect is that tactical, short-term decisions of limited importance made by foreign investors can have a significant impact on the Ibovespa. During the upward move that occurred through April, the net inflow of foreign capital into B3 was R$69 billion. The most reasonable explanation is that several global investors were wary of the concentration in the American market and sought diversification into emerging markets. The Ibovespa rose in line with indices from several other emerging markets. In the pullback through June, the net outflow of foreign capital was R$36 billion, likely caused by rising American interest rates and the mega-IPOs of companies in the United States. In other words, what drove the sharp price swings in the first half of the year has little relation to Brazil's economic scenario.

The conclusion is not that what happens in Brazil doesn't matter, but that local fundamentals tend to influence long-term results more than short-term ones. If Brazil becomes a more attractive economy for foreign investment, we should receive more capital over the years, but the behavior of foreign investors next month may have no correlation with that at all.

An analogy that helps to understand this dynamic of peripheral markets is to imagine how the restaurant sectors of São Paulo and Guarujá behave. The aggregate revenue of restaurants in São Paulo depends on the results of the São Paulo economy, since the public is mostly made up of city residents, and it is reasonable to expect they will spend more on restaurants if they are more successful.

The case of Guarujá is different. In the long run, how attractive the city is as a tourist destination will matter for its restaurants' revenue, but, next month, the weather on weekends or the existence of long holiday weekends may impact restaurant results more than the city's economic performance. Especially because the decision to visit Guarujá or not is not very important to the São Paulo tourist. They may see clouds in the sky on a Friday and casually decide not to spend the weekend at the beach, even if the real chance of rain is low under a more careful analysis.

The conclusion is that peripheral markets are naturally more volatile, because they are more vulnerable to external factors and because they receive less scrutiny from investors who have only a very small portion of their portfolios invested in them.

Short-term focus and pro-cyclical behavior

Another factor that contributes to local volatility is that the average holding period for stock investments keeps getting shorter. In the early 2000s, an investor held each stock in their portfolio for about 3 years, on average. Since 2020, that period has been less than a year, and the downward trend appears to be continuing.

Source: World Federation of Exchanges

Part of this reduction in the average holding period comes from the growing participation of quantitative funds that trade large volumes daily (high-frequency traders), but we have also observed directly, in conversations with equity fund managers and individual investors, that a good portion of Brazilian investors are quite sensitive to price swings within a few months.

The rational behavior of any buyer is to increase their appetite when prices fall and reduce purchases when prices rise. Except in the stock market, where the exact opposite generally happens. Many investors interpret rising prices as a good time to buy stocks and falling prices as a sign that it's time to sell. This behavior, which starts from the premise that the price trend observed in the recent past will extend into the near future, is called momentum trading and contributes to increasing the intensity of market cycles, regardless of the reason a price movement was initially triggered.

Now consider the two phenomena we've described at the same time: foreign investors who decide to increase or reduce their investments in Brazil, often for tactical reasons unrelated to the fundamentals of local companies, and, in parallel, Brazilian investors making decisions driven by short-term price trends. The result is high volatility that is at times uncorrelated with the economic fundamentals of local companies. A dynamic quite familiar to anyone who has followed the market for some time.

Who is setting valuations?

We've already mentioned that most of the volume traded on the stock exchange comes from foreigners, but below is the full picture of the representation of each investor profile on B3:

Source: B3, May 2026

Among these groups, the Institutional group is where investment funds and pension funds are found (vehicles managed by market professionals). They are the ones who should be the main price setters on the stock exchange. However, not all institutional investors are fundamentals-driven investors who operate based on detailed analyses of each listed company's fair value. There are quantitative funds trading based on statistical tools, passive funds that simply track the Ibovespa portfolio, and multi-strategy funds that focus more on macroeconomic analysis than on individual companies.

Even among equity funds, there are managers who operate based on chart analysis or on sector theses that are more qualitative than quantitative. There are also speculators, who make short-term bets based on rumors or news flow.

Traditional fundamentals-driven investors, who deepen their understanding of each target company and dedicate significant time to estimating its fair value, are a minority in the market. They likely account for less than 10% of the total volume traded on the exchange, although there is no official data on sub-segments to confirm this point.

Representation in trading volume is related to representation in price formation. With most participants potentially having reasons other than fundamentals to trade stocks, it's no surprise that meaningful mismatches arise between price and intrinsic value in the stocks listed on our exchange.

The opportunity that arises

The fundamentals-driven investor's ideal is not for the market to always be right and to price stocks at their intrinsic value. It is more advantageous for the market to be volatile and to have erratic price trends, so that buying opportunities arise when prices are below their fair value estimates and selling opportunities when they are above. This seems to go against the common wisdom that volatility represents risk, but there is an important nuance to this question.

The volatility of a company's results is different from the volatility of its stock price. In a market where assets are well priced, these two variables should coincide. Volatile prices should be a direct reflection of volatile results. In markets with pricing inefficiencies, there can be price volatility even when the underlying company's results don't fluctuate as much. In that case, price volatility is not a source of risk, but rather of investment opportunities.

We are convinced that the Brazilian stock market fits this second case. We have long tracked companies with reasonably stable results and disproportionate price volatility in their stocks. Our average return of 28.5% per year is higher than the average return our companies had on their shareholders' equity because we had the opportunity to take advantage of price mismatches that arose in the market over time.

The idea that price swings should be interpreted only as buying and selling opportunities, and not used as a guide for investment decisions, is quite old. It was first put forward in 1949 by Benjamin Graham in the book "The Intelligent Investor" and popularized by Warren Buffett in the line "The market is there to serve you, not to instruct you," written in Berkshire Hathaway's 1987 letter to shareholders. It still works just as well today, for investors capable of maintaining rationality in their decisions.