Committee hinted possibility of new hike in September


Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

The Central Bank’s Monetary Policy Committee (Copom) raised the Selic policy interest rate by 50 basis points on Wednesday, to 13.75% per year, and hinted that it will evaluate the need for a “residual adjustment, of lower magnitude,” in its next meeting, to be held on September 20 and 21. Another novelty was the 12-month projection for inflation until the beginning of 2024, presented because of the impacts of elections on prices.

“The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting,” it said in a statement released after the unanimous decision. The Copom stated, however, that it “it will remain vigilant and that future policy steps could be adjusted to ensure the convergence of inflation towards its targets.” Another highlight is that “the uncertainty of the current scenario, both domestic and foreign ones”, coupled with “the advanced stage of the current monetary policy cycle, and its cumulative impacts yet to be observed, require additional caution in its actions.”

According to the Copom, it was noted that inflation projections for the years of 2022 and 2023 “were heavily impacted by temporary tax measures across calendar years.”

“Therefore, the Committee decided at this moment to emphasize the projections for 12-month inflation in the first quarter of 2024, which reflects the relevant horizon, smoothens out the primary effects from tax changes, but incorporates their second-round effects on the relevant inflation projections for monetary policy decisions.”

The Copom stated that the decision to raise the Selic rate by 50 basis points, taken unanimously, reflects “the uncertainty around its scenarios for prospective inflation, an even higher-than-usual variance in the balance of risks and is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon,” which includes 2023 and, to a lesser extent, 2024. The last time the rate was at its current level was in December 2016 and early January 2017.

“The Committee considers that, given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into even more restrictive territory,” said the Central Bank in the statement.

The monetary authority also pointed out that the external environment remains “adverse and volatile,” citing “marked downward revisions on prospective global growth in an environment of inflationary pressures.”

“The process of normalization of monetary policy in advanced economies has accelerated, affecting the prospective scenario and increasing the volatility of assets,” says the statement.

Regarding the Brazilian economic activity, the Copom wrote that the set of indicators released since the last meeting “continues to suggest that the economy grew throughout the second quarter, with the labor market recovery stronger than expected by the committee.”

“Consumer inflation remains high in volatile components and items associated with core inflation,” it stated. And concluded: “The various measures of underlying inflation are above the range compatible with meeting the inflation target.”

Copom’s inflation projections in the baseline scenario stand at 6.8% for 2022, 4.6% for 2023 and 2.7% for 2024, according to the Central Bank. For regulated prices, inflation projections are -1.3% for 2022, 8.4% for 2023 and 3.6% for 2024.

“The projections based on the reference scenario incorporate the tax measures recently approved,” highlighted the Copom in the statement. “For the six-quarter-ahead horizon, which mitigates the calendar-year impact but incorporates the second-round effects of the tax measures that occur in 2022 and the first quarter of 2023, the 12-month inflation projection stands at 3.5%. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.”

*By Estevão Taiar, Guilherme Pimenta — Brasília

Source: Valor International

The strategy of betting on the appreciation of bank stocks and commodity-related companies – which yielded substantial returns in the first quarter – is slowly losing steam. As foreigners decrease the volume of their purchases in Brazil in April, local investors report a more uncertain scenario and fewer alternatives for the continuity of the Ibovespa rally, since the macroeconomic fundamentals of the country do not bring much comfort to the allocation in domestic issues.

Higher uncertainties are also reflected in the larger cash position of local funds. According to a survey conducted by Bank of America (BofA) with Latin American asset managers, cash levels remained at 7.7% in April, the highest since records began, in 2018, and well above the survey’s historical average of 4.4%.

The lower confidence of financial agents stems, among other reasons, from the question mark about the growth of the global economy. With the indication of the U.S Federal Reserve that it is expected to speed up tapering, fears have also grown that further monetary tightening could lead the U.S. economy into a recessionary period. At the same time, China’s tough policies to contain the Covid-19 pandemic could also weaken demand in the world’s second-largest economy.

In this sense, the notion that global growth would remain healthy despite the normalization of monetary policy in the United States started to be, if not entirely questioned, at least considered by many global agents. Thus, after a substantial appreciation of the most liquid stocks on the Brazilian stock exchange – both in local currency and in dollars – the foreign flow has shown signs of stabilizing in April.

This month, shares of the mining and steel industries, as well as banks, went south, in contrast to the first three months of the year. Vale ON falls 15,98%, CSN ON drops 15,41% and Usiminas PNA loses 15,03 %. Bradesco PN, Itaú PN and Santander units have declined 5,12%, 6,97% and 6,21%, respectively.

The problem, analysts told Valor, is that the rotation to other sectors of the Brazilian stock market has not convinced financial agents either.

Ricardo Peretti — Foto: Anna Carolina Negri/Valor

Ricardo Peretti — Foto: Anna Carolina Negri/Valor

“My opinion is that holding commodity [stocks] is no longer a novelty as it was a few months ago, and the whole market ended up doing it. However, I don’t feel as comfortable migrating to more technology-related stocks or to assets that are more exposed to the domestic scenario. I would still stay from neutral to slightly overweight on commodities,” said Ricardo Peretti, an equity strategist at Santander Corretora.

The view is similar to that of XP’s chief strategist Fernando Ferreira. According to him, the firm still tends, at the moment, to be upbeat with stocks linked to commodities in relation to assets more dependent on the local economy, since the macroeconomic fundamentals are still bad, with weak activity and high inflation. But the conviction about commodities of early 2022 no longer seems to be the same.

“We think it is too early to rotate into growth assets, as the macro environment is still not good and commodity companies continue to generate a lot of cash, with strong dividend yields. The asset prices also remain historically low, which, in theory, is a good entry point indicator, but it can also suggest that the shares may face a correction soon,” he said.

In addition, the strategist said he is concerned about a potential change in the behavior of foreign investors, who “propped up” the local stock market in the first quarter by buying, precisely, stocks linked to commodities and the financial sector, but put negative pressure on the index in April.

“The slowdown in the flow draws attention, and a possible reversal of this movement would be a major concern for the [stock index] Ibovespa, precisely because the local institutional investors are still dealing with redemptions. If international investors start selling their positions in Brazil, who will be the marginal buyer? I don’t think the factors that brought these investors here have changed, but we can see additional pressure,” he said.

Jorge Oliveira, an equities manager at BlueLine Asset Management, also ponders that the local market may be experiencing a turning point, assuming that foreign investments, focused mainly on commodities and the financial industry, have no longer shown the same strength as before.

“With Petrobras stocks slowly gaining ground and China’s slowdown affecting metal commodities, the narrative that had Brazil as a destination for international investors has been put to the test. Valuations are cheap, but the Chinese government is still propping up the economy there. In case the stimulus expected by the market does not come, there may still be a downward revision of companies’ profits, making them not seem so cheap anymore,” he said.

Along these lines, between February and March this year, the asset manager considerably reduced its positions in stocks in its Blue Alpha B hedge fund, privileging exchange and interest rate products.

There are, on the other hand, those who still feel more comfortable with commodity-linked assets. Victor Nehmi, manager of Sparta’s commodities fund, points out that when commodity prices move uniformly, it is a sign that macroeconomic imbalances are occurring.

“We see no signs that prices have peaked and that they will start to fall from here on out. There is no prospect of an increase in the supply of the main commodities and this gives us conviction that prices are likely to remain high at least until next year,” he said.

According to him, the high prices of commodities are likely to still be reflected in the corporate results of companies over the next 12 months. Mr. Nehmi’s only caveat that the recent appreciation of the real reduces exporters’ margins.

Lucas Brunetti, a commodities analyst at Garde Asset, also sees the worsening of the industry as unlikely. He is upbeat about the fact that China has seen such a flagrant slowdown in the economy, since this is expected to stimulate more forceful government action.

“The Chinese government was restricting credit, now it is expanding it. Also, with the lockdown, services naturally fall. And if the third sector is not advancing, the state apparatus, which seeks to deliver a GDP growth close to the 5.5% estimated for 2022, will need to invest in infrastructure,” he said.

Source: Valor International

Green Recovery', recuperação económica é verde - Iberdrola

A post-pandemic green recovery can bring to emerging countries much more than a return to economic activity, but to attract companies and promoting sustainable development, especially in Brazil.

This was one of the conclusions of a study by the Global Wind Energy Council (GWEC). On the other hand, the agency also warns that the country risks losing hundreds of thousands of green jobs, billions of dollars and billions of tonnes of saved emissions if it chooses another path.

In an interview with Valor, the GWEC’s CEO Ben Backwell and the executive president of the Brazilian Wind Energy Association (Abeeólica), Elbia Gannoum, emphasize that a political commitment is needed to mobilize private investment.

In total, Brazil could add an additional $8 billion of gross value added (GVA) to national economies in the recovery scenario. “This is an activity in which most of the investments come from the private sector. In addition, the industry is a huge job creator,” says Mr. Backwell.

In GWEC’s calculations, Brazil could see 575,000 green jobs over the lifetime of the wind farms if it opted for a green recovery rather than a business-as-usual approach.

Ms. Gannoum adds that more companies could land in Brazil because of the attractiveness of the business. Today, there are only six wind turbine manufacturers and two wind blade companies, but this number could grow more.

She recalls that, unlike what happened in developed countries that made billion-dollar recovery plans, in the case of developing countries, government does not have the capacity for the recovery.

“The renewable energy sector has a strong attraction for private investment and Brazil, in this scenario, should look at the situation as an opportunity. We have an abundance of renewable resources, so the energy transition is a great business opportunity for companies.”

From 2022 to 2026, the report calculates a 40% reduction in carbon emissions, helping the country accelerate progress in meeting its Paris Climate Agreement targets.

The report focuses on five countries – Brazil, India, Mexico, the Philippines and South Africa – each of which face specific challenges due to Covid-19 but which have significant untapped wind energy resources that can unlock rapid economic growth under green recovery measures.

“Unlike Mexico, where the government has practically stopped investments in the wind sector, Brazil has better conditions to develop the wind industry”, compares Mr. Backwell.

The executive says that this energy source grows significantly in the world, but it should be between three and four times bigger to reach the decarbonization goals. “We should be installing around 400 GW a year, but we are installing just under 100 GW.”

Source: Valor International