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GameStop mania mimickers quickly lose steam in LatAm

Retail investors' attempts to engineer a short squeeze like the one seen in the U.S. last week have so far not been successful in Latin America. And it is unlikely that they will be any time soon at least in similar scale and magnitude, — analysts told S&P Global Market Intelligence.

Inspired by the GameStop Corp. frenzy, retail investors in Brazil and Chile who rallied around IRB-Brasil Resseguros SA and mining and renewable energy company Schwager Energy SA quickly lost steam as they failed to garner significant traction, partly due to the strict regulatory limitations in place.

Analysts in several Latin American financial markets consulted by S&P Market Intelligence all agreed on the low probability of such an event taking place in the medium term, given a market with a low base of retail investors and regulatory limitations to shortselling activities, especially in Brazil.

On Jan. 28, the largest reinsurer in Brazil, IRB, saw its stock increase by as much as 17% as a group of retail investors coordinated efforts through Facebook in order to propel the stock. Shares of the reinsurer had been teetering since early 2020 following a highly publicized short bet by Squadra Investments – Gestao de Recursos Ltda. Squadra's presentation of alleged accounting irregularities precipitated a governance crisis which ultimately wiped billions of reais in IRB's market value.

GameStop-inspired investors in Brazil decided to rally around the reinsurer, a frequent target for short-sellers. A Facebook group under the name IRBR3 Forum Investing had as many as 10,500 subscribers as of Feb. 4, in which investors championed the stock in what they depicted as a struggle between "sharks" and "sardines," as individual investors are popularly known. Other groups reportedly formed in Telegram and other social networks.

With record volume traded on Jan. 28, the financial regulator launched an investigation into the sharp rise in the price. But whereas activism in the case of GameStop saw its shares soar by as much as 700%, IRB's rally has fizzled since then and the share price has returned to previous levels of trading.

Analysts attribute that in part to a low base of retail investors in the market. "Only 1% to 2% of the Brazilian population actually invests in stocks," Igor Cavaça, an investment analyst with Warren Brasil, told Market Intelligence. Despite rapid increase in the number of retail investors in equity, the market is still very much controlled by the institutional players, he said.

By contrast, Reddit forums in the U.S. such as wallstreetbets, whose users propped up GameStop shares, can have millions of users.

But in addition to a low investor base, analysts argue that the current rules set by stock market operator B3 SA - Brasil Bolsa Balcão make it virtually impossible for such a scheme to proliferate in Brazil.

"Whenever there is a huge spike in shares being traded, the exchange suspends trades and the market goes into auction mode," Luis Sales, head of equity at local investment firm Guide, explained. "That is why we will not have this kind of movement here in Brazil."

In practice, the auction mechanism prevented IRB stock price from appreciating further, Cavaça said.

More importantly, B3 has established caps that seriously limit the capacity for short-sellers to build up massive positions. Only up to 20% of the free float of companies in the stock exchange can be subject to rental. This in stark contrast with the GameStop case in U.S. markets, where the short interest exceeded 100% of the available shares.

"We have much lower leverage for this sort of operations in Brazil," Sales said. That, he explained, impaired the so-called short squeeze effect, in which firms that need to rebuy the stock to close their position wind up contributing to a snowball effect on the price.

But whereas other stock exchanges in Latin America might not share the same caps, low popularization of retail investing prevails across regional markets. "It is very unlikely for something like this to happen in Colombia," Ivan Agudelo, an equity analyst at Colombian Allianza Fiduciaria, said. "Individual investors barely reach 16% of the volume traded in local equity."

In Chile, retail investors under the Twitter hashtag #TodosSomosSchwager rallied around mining and renewable energy company Schwager. As a result, the stocks saw a 13% increase on Feb. 1, but receded on following days, falling 7% on Feb. 4.

"#TodosSomosSchwager is a clear example of why this is very hard to replicate in the local market," Ramón Domínguez Hernández, portfolio manager with Chilean firm MBI Inversiones, told S&P Market Intelligence. "The stock saw a surprising rise, but ended up closing with a very moderate variation."

A lower quality of services can also deter initiative such as the GameStop case. According to him, higher costs can easily discourage a buildup of a large pool of investors.

"Unlike the U.S., the local market has comparatively higher share transaction costs, he said. "This leaves many retail investors out."