The Brazil of interest rates at double-digit levels produced a first quarter of good results for investors. It was good for those who stayed with the safety of fixed income and even better for those who were encouraged to shoulder the stock market risk and bet on more volatile classes, such as multimarket and stock funds.
The Ibovespa, the main barometer of the local variable income market, appreciated by almost 15%, boosted by foreign capital. The flow of new money also led to an appreciation of the real against the dollar and those who had funds in hard currencies saw this portion of their portfolio shrink.
The Russia-Ukraine war, new cases of Covid-19 in China with shutdown policies in Shanghai, adjustment of the American monetary policy and elections in Brazil in the second half are all risk factors, but when you look at the picture of this early 2022 it doesn’t even seem as if that movie is subject to twists and turns in its story. Inflation both locally and in the U.S. continues to be a source of concern.
“It is difficult to argue against capital flow,” says a financial market adage, and it is a fact that it is the international capital that has been guiding the appreciation of Brazilian assets. In dollar terms, the Ibovespa gained almost 35% this year.
Foreign investors have already bought net R$89.6 billion in stocks in the spot market by March 29, while individuals have withdrawn R$25.4 billion. Local institutional investors withdrew more R$71.2 billion, according to B3. In this group are asset management companies, who had to sell assets to cope with the requests for redemption of shareholders. In the year to the 28th, stock and hedge funds saw withdrawals of R$72.7 billion, according to the Brazilian Financial and Capital Markets Association (Anbima). On the other hand, fixed-income portfolios attracted R$128.2 billion.
But it is precisely in periods of greater aversion to loss — when the investor goes to fixed income massively — that may be the best time to compose the portfolio with higher risk assets, according to Fernando Lovisotto, chief investment officer of Vinci Partners. He sees in this beginning of 2022 a scenario similar to 2016, with recovery in commodity prices pushing exports and Brazil benefiting from the foreign flow.
With the rapid adjustment of monetary policy and the cycle of interest rate hikes now nearing an end, “the correlation of commodities to the real is back in place, it is something that had been lost between 2020 and 2021,” Mr. Lovisotto said.
He suggests rebalancing the portfolio, increasing the proportion of assets that have fallen, to the structural level. “I think it’s good the opportunity level for the return level.” He expects foreign inflows to be long-lived, as the number of investable emerging countries has been reduced with the Russia-Ukraine conflict and there are question marks regarding China and India. “But there is volatility, [the investor] will go through some turbulent moments along the way: there’s an election and we don’t know the outcome of the war.”
The specialist sees potential for virtually all local classes, among strategies linked to real and nominal interest rates, shares and multimarket funds, which again had a good performance in the first quarter. For Mr. Lovisotto, this is a window that extends for 24 months. “The managers are gaining, in general, with positions in rising U.S. interest rates, in local interest rates, in the stock market, and in the currency,” he says. He thinks there is still a lot of premium along the maturities of government bonds and futures contracts, with real interest rates of up to 7%, which has also drawn the attention of foreign capital.
In the stock market, if at first the flow has favored raw material producers’ stocks, it is expected that with the end of the high interest rate cycle the stocks linked to the domestic cycle will perform well, adds Mr. Lovisotto. March may have already been an indication of this movement, with the “small caps” index rising almost 9.5%.
As for the portion of the portfolio linked to international assets, the indication of the Vinci executive is not to increase what the investor has today, just to maintain the portion that fulfills the role in the diversification of currencies and geographies.
With new inflationary shocks resulting from the war between Russia and Ukraine and the scenario of monetary tightening in developed economies, Rodrigo Eboli, an asset manager at Brainvest, says that the most prudent thing to do is to maintain a well-diversified portfolio without running major risks. As much as local assets have performed well throughout the first quarter, Brazil has not had great improvements in terms of fundamentals since December.
“There are elections ahead, which are far from being defined, the doubt about what fiscal policy the next administration will put in place, but as prices were very depressed, with exchange rates, interest rates, and the stock market already reflecting a high degree of pessimism, there was this recovery,” Mr. Eboli said. He cites that real interest rates at 5%, 6% are inviting to any investor when compared to developed economies, which are in the process of monetary adjustment at a later stage than some emerging countries. The foreigners who were outside the risk entered quickly, but he thinks that this is a more opportunistic capital, which does not commit to the long term.
At Brainvest, the manager says that the investors’ portfolio is more defensive. In fixed income, the company had already shortened the allocation in fixed-rate and inflation-linked securities for the 2023 maturities. The floating-rate securities, already yielding 10% a year, help the portfolio not to suffer sudden oscillations in the short term, and with this mix it was possible to preserve the exposure to variable income and hedge funds.
“We still think this is a challenging year, we need to take risks, but we won’t have a full pot,” says Mr. Eboli. “The main lesson of the first quarter was the importance of not being contaminated by excessive pessimism, like at the end of last year, when market prices reflected this. Those who were resilient didn’t change their portfolio and are now reaping the rewards.”
Despite the more favorable exchange rate for international diversification, he says investors have to consider the interest rates at 12.75%, the level the Selic, Brazil’s benchmark interest rate, is expected to reach. “The opportunity cost has increased and it’s not easy out there. With the Fed raising interest rates — and no one knows the terminal rate — and stock market prices at ten-year highs, you have to think.” For those who have nothing overseas, it makes sense to set up an offshore allocation plan.
Given the set of uncertainties, with oil shock and geopolitical confusion, the election in Brazil seems to have taken on a supporting role, said Renato Junqueira, managing partner at Gap Asset Management. “The market may price one thing or another. It is not expected to change much until the second half of the year. Prices will be more subject to the global scenario.”
Source: Valor International