Fresh foreign investment in Brazilian stocks plunged 70 per cent in the first half of 2011, dragging down a market that been one of the hottest last year.
Rising inflation, political interference in key sectors and measures to slow credit growth have all damped foreign investor sentiment towards Brazil's equity market, forcing some companies to scrap public offerings despite the strength of the country's economy.
"We've seen a huge decline this year for a variety of reasons - both macroeconomic issues and also specific internal problems with companies such as Vale and Petrobras that make up such a big part of the market," said André Luis Querne, a partner at asset management firm Rio Gestão de Recursos.
While foreign direct investment has flooded into Brazil, cross-border portfolio investment in the country's stock market during the first six months of this year dropped to $2.89-billion (U.S.) from $9.74-billion in the same period of 2010, central bank data show.
Dragged down by lacklustre investment from locals as well, Brazil's benchmark Bovespa stock index has now fallen about 13.5 per cent in the year to date, underperforming emerging markets such as India, as well as Wall Street and Europe's main indices.
One of the main reasons for this decline is inflation, which has run above the central bank's limit of 6.5 per cent on an annual basis since April, leading policy makers to raise the benchmark interest rate five times this year to 12.5 per cent and so making fixed income a more attractive option.
"Because bonds are paying 12-13 per cent investors are overlooking stocks, leaving many good companies undervalued," said Massimo Massimilla, a partner at London-based hedge fund Algebris Investments.
Tony Volpon at Nomura added that unease was also growing about "heavy handed political interference in some companies which is forcing them to undertake value-destroying investments."
In particular, shares in mining giant Vale have been hit by government efforts to push out the former chief executive earlier this year and align the company more closely with national interests by encouraging greater investment in the steel industry.
Despite holding the rights to one of the world's biggest offshore oil reserves, Petrobras has also fallen this year, plunging about 19 per cent from this year's peak in March as concerns grow about its financing needs and onerous state restrictions such as local content requirements.
Meanwhile, banking and construction stocks have suffered from sporadic measures by the government to rein in lending and concerns over a possible credit bubble.
As well as raising interest rates, the finance ministry and central bank have introduced a series of so-called macro-prudential measures this year to cool the economy - many of which have never been used before and came with little warning.
Itaú-Unibanco, Brazil's largest private sector bank, has estimated its loan portfolio could grow up to 20 per cent this year in spite of tighter monetary policy, but its shares are still down about 19 per cent so far in 2011.