SAO PAULO, Sept 2 (Reuters) - Foreign investors pulled the most money out of Brazil's cash equity markets in more than two years in August, as signs of a steeper-than-expected slowdown in China and mounting political and market turmoil in Latin America's largest economy undermined the appetite for stocks.
Net outflows from the São Paulo Stock Exchange reached 3.314 billion reais ($880 million) in August, the highest level since 4.07 billion reais in July 2013, data from exchange operator BM&FBovespa SA showed on Wednesday.
Outflows increased significantly from July, when they reached 567.9 million reais. In the first eight months, the exchange received net inflows of 17.657 billion reais from non-resident investors.
The numbers underscore growing risk aversion around the world as a slowing Chinese economy and declining commodity prices are reducing the allure of investments across emerging market countries. The inability of the Brazilian government to fix eroding public finances is further unnerving some investors.
"To the extent that signals from China continue to feed uncertainty and the adverse local economic and political news persist, including the materialization of Brazil's sovereign rating below investment grade, so should outflows," said Axel Christensen, chief Latin America and Iberia strategist at BlackRock Inc.
The Bovespa stock index has shed 34 percent in U.S. dollar terms this year.
Still, if China's situation stabilizes and on the local front political and market noise diminish, "investor perception could change and thus the direction of flows," Christensen noted.
The worsening of a recession that is expected to be Brazil's steepest in at least 25 years, as well as increased political bickering that could limit efforts to implement fiscal austerity measures, casts a cloud over flow trends in coming months, analysts said.
"The macro story in Brazil continues to be an overhang to equities," Bank of America Merrill Lynch strategists led by Felipe Hirai said in a client note, adding that short-term risks include potential downward revisions to earnings estimates and weak fiscal results that could translate into higher interest rates.
$1 = 3.7626 Brazilian reais Reporting by Paula Arend Laier; Editing by Guillermo Parra-Bernal