Brazilian assets are attractively priced, says Xavier, from SPX; spending evolution concerns Stuhlberger, from Verde Asset
Roberto Sallouti — Foto: Carol Carquejeiro/Valor
After the electoral race, capital and investment market heavyweights are in “recalculating route” mode, based on the signals given by President-elect Luiz Inácio Lula da Silva about the design his administration may have as of 2023. The spotlight is on the transition team and the names that may take over the economy and state-owned banks and companies.
There are the optimistic ones, such as Rogério Xavier, founding partner and CIO of SPX Capital, who evaluates that the Brazilian assets “are for free,” while the team of Luis Stuhlberger’s Verde Asset points out concerns with public spending. Roberto Sallouti, CEO of BTG Pactual, still has doubts about how the fiscal policy will be conducted in Mr. Lula da Silva’s third term.
The price of Brazilian assets is attractive to investors and the economic scenario tends to be favorable for the country, in Mr. Xavier’s view. For this more benign environment to materialize, Mr. Lula da Silva must pick a highly-qualified economic team, he said. “I think Brazil is for free, prices (of assets) are good, and the exchange rate is in the right level. Brazil has no problems and is doing its role,” he told Valor during the Brazilian Private Equity and Venture Capital Association (ABVCAP) Congress in Rio.
According to him, the elections took place democratically in an appropriate manner, and surprisingly calm, considering previous expectations about political polarization. He reiterated his “relatively optimistic” view and believes that Mr. Lula da Silva knows that he was elected by forces that tend to the center and not by the “Workers’ Party’s flag.” If the president-elect wants to work only with the left, the government will be at risk, he said.
In Mr. Xavier’s view, the starting point of the economy is not bad, but the commitments made ahead are a problem. “What helped us in the last years will not help us from now on. We need people and policies in line with the strategy of taking care of the fiscal situation,” he said, adding that the president-elect is aware of this. He expects that Mr. Lula da Silva will compensate for the waiver he is asking from the National Congress to breach the spending cap by picking a good economic team.
In Mr. Xavier’s view, Brazil has fallen off the foreign investor radar in recent years due to some unfortunate statements by President Jair Bolsonaro. “On the Amazon issue, funds withdrew their support basically because of the government positions. Now they are returning expecting dialogue and a different stance towards the environment [under a new administration],” he said.
The executive also commented that Brazil is “completely alone” in the universe of emerging markets, in a privileged position to attract capital. “We don’t have to do spectacularly well, we just can’t mess up,” he said, adding that it is still necessary to show a sustainable trajectory for the debt-to-GDP ratio.
Mr. Sallouti, with BTG Pactual, confirmed that the economy is experiencing a moment of great uncertainty because there is no clarity about what the fiscal policy of the new administration will look like, and consequently the trajectory of public debt and the size of the tax burden. The lack of definitions regarding reforms and public concessions is also a factor.
“We don’t know what the posture of the state-owned banks is going to be. In the last six years, we have had a classic ‘crowd in’ effect, with private-sector banks gaining space,” he said during an earnings conference call. “I think that no matter the change in the agenda of the state-owned banks, it will not put an end to the growth that we have seen in recent years in the capital markets. The continuity of that growth curve will depend on those policies.”
Meanwhile, Mr. Stuhlberger’s Verde Asset multimarket team wrote in its monthly letter that the outcome of the second round of elections, with Mr. Lula da Silva’s rather narrow victory, went in the direction, though not to the magnitude, expected by most analysts, and that markets had already priced that somehow.
However, Verde Asset is concerned with the first fiscal signals and discussions of the new administration. “The so-called Transition PEC [proposal to amend the Constitution] is turning out to be (yet another) Brazilian uncontrolled spending spree. The suggested value, over R$200 billion, is something ‘completely unreasonable’,” they wrote.
The president-elect’s rhetoric, which assured during the campaign that he would have fiscal responsibility as in the previous two terms and that he would not need a spending cap or other framework, “this kind of ‘take-my-word’ approach risks to be very short-lived if not followed by decisions and behaviors that corroborate it.”
The days following the second round happen to encounter a friendlier global market, the Brazilian assets performed very well, and hedge fund Verde benefited from this rally.
The fund closed October with an appreciation of 3.51% and has gained 15.2% this year, compared with an interbank deposit rate (CDI) of 10% in 10 months. Positions in the Brazilian stock market, oil, currencies, global interest rates, and offshore credit have driven the good performance, thus offsetting bets in global equities, inflation-indexed bonds in Brazil, and gold, which performed poorly.
SPX’s Nimitz fund, on the other hand, lost 1.21% in October, but gained 26.4% this year. In Brazil, the fund bets on lower interest rates.
*By Juliana Schincariol, Álvaro Campos, Adriana Cotias — Rio de Janeiro, São Paulo
Source: Valor International