For asset managers, U.S. rate cuts and China’s stimulus package could lead to stock market recovery

10/01/2024

September felt like all of 2024 unfolded in a single month. It featured the expected rate cut by the U.S. Federal Reserve, a hike in Brazil’s Selic policy rate, and even stimulus measures for China’s economy. The renewed monetary tightening in Brazil kept fixed income in focus, making it the top performer for the month, with a CDI (Interbank Deposit Certificate) return of 0.84%. For the quarter, the rate stood at 2.63%. Meanwhile, after a strong August where Brazil’s benchmark stock index Ibovespa rose by 6.54%, it ended September down 3.08%, with a quarterly decline of 6.38%. The U.S. dollar declined by 3.30% against the real in September and 2.53% over the quarter.

“The best asset of the month was the CDI, outperforming the Ibovespa, real estate investment funds, and a basket of inflation-linked securities,” said Marcelo Mello, CEO of asset manager SulAmérica Vida, Previdência e Investimentos. He mentioned that fixed income attracted over R$43 billion in September, mainly into credit funds, while multimarket funds saw outflows of R$40 billion and equities lost R$2 billion. On the other hand, the pension funds segment gained R$4.5 billion.

Mr. Mello noted that both the rate cut in the U.S. and Brazil’s monetary tightening had been anticipated, with the key question being the pace. The Federal Reserve, he explained, started with a stronger approach, with its base rate potentially reaching 3.5% this year, while Brazil’s tightening began more cautiously, with a 25 basis-point hike but a tougher stance, leading the market to project 50 bp increases at each meeting. SulAmérica Vida expects the Selic rate to reach 12.5% per year by the end of the cycle.

“We began the year expecting more rate cuts in Brazil, which would have opened a window for IPOs, but the opposite happened,” Mr. Mello summarized. However, while the tighter monetary policy directly impacts Brazilian assets, it doesn’t rule out a stock market recovery. The monetary easing in the U.S. opens the door for a rebound, with the expected return of foreign investor inflows, along with the boost from China’s stimulus package. “China’s stimulus measures provide a lift to commodities, although it’s still uncertain if they’ll be enough,” Mr. Mello pointed out.

For Tiago Cunha, equity manager at Ace Capital, the domestic environment offers little incentive for riskier investments, and the government’s fiscal policy signals don’t inspire confidence. However, the external outlook—with moderate U.S. economic growth, falling interest rates, and China’s stimulus package—is starting to influence foreign investors’ portfolios.

“Everyone was expecting the Chinese stimulus package, but there was no clear indication of when it would happen, which is why all positions related to the country were at historic lows. Now we’re seeing a boost in these positions, especially through emerging markets funds, and Brazil ends up benefiting from this,” Mr. Cunha said.

Mr. Mello, of SulAmérica, noted that while equities aren’t very attractive to domestic institutional investors, he also sees international flows coming into emerging markets as U.S. rates fall. “For the stock market, what’s most relevant isn’t China, but U.S. rates,” he said. “Stocks are trading at a discount, and companies have been reporting satisfactory results. If the U.S. monetary policy direction is confirmed, we could see foreign inflows.”

Mr. Cunha, from Ace, also mentioned that foreign investors are puzzled by Brazil’s divergent path on interest rates compared to the rest of the world. “They struggle to understand, especially given that the inflation we’re trying to control isn’t far off target. It raises questions about how often the market consistently overestimates inflation and underestimates economic activity.”

For him, since the extent of the tightening cycle is unclear, it’s also impossible to predict when rate cuts will resume. “If it depends on anchoring expectations, there’s the additional challenge of aligning fiscal policy with this.” Amid all volatility in expectations, the IMA-B 5+ (an index reflecting the performance of government bonds indexed to the IPCA official inflation with maturities over five years) fell 1.42% in September, while the IMA-B 5 (up to five years) rose 0.4%. Over the quarter, the indexes saw gains of 2.55% and 1.92%, respectively.

In equities, indexes linked to domestic activity, given the forecast of a stronger Selic rate hike, fell more than the Ibovespa: the Small Caps index dropped 4.41%, and the Icon retail index declined 4.71%. “The economic data has been strong, and we want to be more optimistic, but we’re being cautious,” said Marcelo Nantes, head of equities at ASA.

Mr. Nantes recalled that August was a good month for stocks tied to the domestic economy, but the firm thought equities had risen too much and started September more cautiously. “New money for the stock market is coming from foreign investors because it’s very difficult for pension funds to invest with interest rates at this level. And retail investors are focusing on tax-exempt securities.”

He said that with the results of China’s stimulus package still unknown, the asset manager is “more in wait-and-see mode than willing to take a gamble,” which is why they kept a small exposure to commodities and reduced their position in companies tied to Brazil’s GDP. The healthcare sector, as well as shopping malls and retail in general, are part of this group. “We like these sectors and made only small adjustments. We also doubled the fund’s cash allocation.”

There were no changes in the electricity sector exposure, where they remained optimistic, and the telecommunications industry allocation grew. “China’s move has turned into a positive risk, and Brazilian activity remains strong, but the fiscal issue is the elephant in the room. If foreign flows return, we’ll revise our view.” At Ace, they maintain a bullish position on commodities while increasing their exposure to technology companies overseas.

The bet on Brazilian stocks isn’t significant at G5 Partners, said Fernando Donnay, partner and head of fund-of-funds at the multifamily office, with an allocation between 5% and 10%, considered neutral. The largest portion of its equity portfolio is invested overseas, where stocks may not be as cheap as in Brazil, but it focuses on global companies. On the other hand, in fixed income, the firm is reducing its allocation, as the risk premiums on private securities continue to shrink.

Mr. Mello, from SulAmérica, also pointed to the ongoing reduction in spreads as a challenge for credit allocations. He noted that some asset managers are starting to limit inflows into their funds to maintain portfolio quality, especially those with daily liquidity.

He believes that as these fundraising limits expand, the market will stabilize. SulAmérica itself has already closed its daily liquidity funds, and on platforms, they’re working to encourage funds with 60 and 90-day maturities, which allow for the pursuit of more competitive rates.

Gabriel Esteca, co-founder and head of infrastructure at Bocaina Capital, doesn’t foresee a change in the high demand for infrastructure bonds, which offer tax exemptions for individual investors. He has been targeting smaller issuances, up to R$100 million, which the firm originates to secure higher rates. “There’s no visible trigger in the short term due to the high demand for credit.”

*By Liane Thedim — Rio de Janeiro

Source: Valor International