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The appreciation of Brazilian risk assets this year was interrupted in April. As the U.S. Federal Reserve signals interest rate hikes amid the perception of unchecked inflation in Brazil, the local benchmark stock index Ibovespa and the real lost steam as the flow of foreign capital slowed down.
The Ibovespa is down 8.4% this month to the 28th, and the consumer goods index declined 11.6%. The foreign exchange rate, which put the dollar at the bottom of the ranking of investments until March, was up 3.8% in the month. Among the fixed-income indexes, the IMA-B 5, which represents a basket of government bonds pegged to inflation with maturity under five years, outperformed its peers and is up 1.5%. On the other hand, the IRF-M, of fixed-rate bonds, lost 0.18%.
Persistent inflation and rising interest rates make fixed income prevail as a safe haven for investors. As a result, this option has received most funds with products ranging from the simplest ones – certificates of bank deposit (CDBs), financial bills and DI funds – to corporate bonds, said Luciane Effting, executive head of investments at Santander. The recommendation is not to concentrate risk, especially when allocating in debt securities – agribusiness and real estate receivables certificate (CRA and CRI) – or debentures, a group of assets in which the individual has the benefit of income tax exemption.
As for variable income, a falling Ibovespa is seen as reflecting the lower confidence in the global economic growth and also in Brazil, the executive said. With the expected acceleration of monetary adjustments by the Federal Reserve, the interest rate differential in relation to Brazil will be lower and part of this translates into a slower flow of foreign capital. “But for any investor who accepts the volatility and is willing to keep the money there for longer, either in the local or international market, [stock] prices are discounted. They can reap good rewards in the long term despite short-term swings.”
Depending on the investor profile, Santander’s asset allocation model provides for a portion in the stock market, even for retail investors, Ms. Effting said. Santander Corretora, the Spanish bank’s broker in Brazil, estimates that the Ibovespa will end the year at 125,000 points, up 14% from the current level. Although inflation and rising interest rates are a concern for those who invest in stocks, some assets benefit from this environment.
Hedge funds, which are seen as having flexibility and agility to change their positions according to the scenario, are also a way to capture gains in moments of uncertainty, Ms. Effting said. After the strong migration to fixed-income alternatives from multimarket and equity funds, she said, investors are again interested in hedge funds after good results in the first months of the year.
Brazil went through a three-and-a-half-month lull, an environment that did not seem favorable to emerging markets given the potential for interest rate hikes in developed countries, said Marcio Schalck, a managing partner at Neo Investimentos. “The local stock market saw a large investment inflow that influenced the exchange rate as well, and assets appreciation. This was not foreseen as interest rates were expected to rise abroad. As time goes on, that impacts prices more,” he said. “Now we are back in the middle of the road, as Brazilian assets start to get a little cheaper.”
That doesn’t mean that prices will not fall further. Because of the external and local scenarios, there is room for additional worsening, Mr. Schalck said. Inflation is the main culprit of the season, with the Fed calibrating its hawkish communication. What is now priced in assets and derivatives linked to U.S. interest rates seems to be insufficient to control the rise in the cost of living. “The Fed may go further than the market anticipates.” The shutdown in China to contain new cases of Covid-19 could bring problems in production chains and keep inflation high.
The environment will be one of volatility, but also of opportunities. As central banks have a reduced capacity to intervene after the interruption of asset purchases and shrunk balance sheets, poorly valued assets will find their most appropriate prices, Mr. Schalck said. “There is no freedom in price when there is strong action by the monetary authority because it [the Central Bank] is the final buyer at any cost.”
As for Brazil, his perception is that the closer the beginning of the election campaign is, the more contaminated the domestic assets, because the candidates’ remarks will not be focused on fiscal austerity, one of the market’s main agendas.
Neo believes that the benchmark interest rate Selic, now at 11.75% per year, will remain high for the next 12 months. “The return has to be great to compensate being structurally long on something,” he said. The company holds very specific stocks, with potential to rise between 20% and 30%, in the financial industry, including insurer Porto Seguro. And it has been combining the sale of some securities from industries more sensitive to interest rates with positions in real rates, a bet that the inflation that is projected in the assets today will decrease to 5% from 7% in six months to a year.
For individuals who like to move on their own, Mr. Schalck thinks that long inflation-indexed Treasury bonds are an opportunity for those who want to build up capital. “You can have volatility in the short term, rates can go up, but looking at longer maturities, these ones have interest rates that you don’t see in the world. And no matter what happens, you have some protection.”
While the presidential election has yet to affect local prices, Brazil is influenced by the external scenario, a journey that includes tackling inflation with tighter monetary policies, the war in Eastern Europe, and the Chinese economy further shutting down to fully contain Covid-19, said Carlos Calabresi, chief investment officer at Garde Asset. The appreciation of commodities has driven the country, a raw materials exporter, but also brought adverse effects on inflation. “And raising interest rates to a restrictive level slows down economic growth.”
This adjustment is even more complex in a year of presidential election. “The economy is likely to be the main topic [of the campaign], and bringing down growth due to inflation is bad, but unchecked inflation is even worse,” Mr. Calabresi said.
He cites that the Central Bank began correcting the monetary excesses made during the pandemic slowly, first signaling a partial adjustment, but then “it had to accept reality and hasn’t stopped until now because inflation continues to surprise upward.” Meanwhile, the Fed and economic agents abroad are learning to deal with price pressures they haven’t experienced for a long time and are slow to understand that the tightening will be greater than anticipated, Mr. Calabresi added. The European Central Bank (ECB), for its part, “remains in denial.”
While the Fed assumes a hawkish stance, the Brazilian central bank signals that the adjustment cycle is near the end, and this sounds rushed, said Marcelo Ferman, CEO of Parcitas. “It should position itself more firmly because the fight against inflation seems to be not well resolved, especially when you look at the world. It is not a solved problem and Brazil is not an island of prosperity,” he said. “Without firm decisions, it ends up having to raise interest rate even more and failing to anchor inflation expectations as it would like.” Despite the fact that the Brazilian central bank has started adjustments early, the quality of Brazil’s official inflation index IPCA remains poor, with greater diffusion.
The asset manager has favored positions in the international market and likes stocks of large technology companies, including Alphabet, Amazon and Microsoft. In Brazil, it holds short positions on the dollar and also on Ibovespa.
Source: Valor International