Since first round of election, local investors have increased bets on the Brazilian currency
High interest rates in Brazil were already in the scenario, as was the perception that key interest rate Selic will remain unchanged over the coming months. But the results of the first round of elections improved expectations of market players for the foreign exchange rate. Caution still prevails as the U.S. dollar has gained ground around the world, but local investors have once again increased their bets on the real.
Data from B3 show that since the result of the first round was known local institutional investors increased their short positions on the U.S. dollar to $58.4 billion on Thursday from $54 billion on September 30, the last trading session before the first round. In other words, they sold $4.4 billion in the period.
The election of a more conservative Congress propped up Brazilian assets soon after the first round and dissipated part of the uncertainties in relation to the direction of fiscal policy in the next administration. Some asset management companies had already adopted a more optimistic view in relation to local markets before the election, and this bias has gained steam, at least in the short term.
“We have turned a little more positive on the real. The currency has fallen behind and investors focused on emerging markets doesn’t have much of an option. Brazil is becoming one of the few alternatives with a good price,” said Reinaldo Le Grazie, founding partner of Panamby Capital and a former director of the Brazilian Central Bank. Given the lack of investment options in large emerging markets and the more positive feeling after the first round of the general elections, the local exchange rate may be favored, at least in the short run, he said.
“The market saw the election result as a very good one. There was a fear of not having a runoff vote in the presidential election, which would be considered bad due to the lack of discussion about the direction of the economy. Now this debate is emerging. Besides this, the market liked the configuration of a more conservative Congress,” said Mr. Le Grazie.
Although Brazil’s fiscal situation remains unclear, he said, the asset management company has a more optimistic view on local assets at the moment and is more concerned with global markets. “It’s a slightly better scenario in a very difficult world. That looks good for the stock market. And, if the stock market moves forward, it is likely to take the currency with it.”
Gustavo Medeiros, Ashmore’s head of global research, had a very positive perspective for Brazilian assets even before the election. Now, by commenting on investments in Latin America, he said that “politics has been the main risk in the last few years.” He recalled that former President Luiz Inácio Lula da Silva (Workers’ Party, PT) and President Jair Bolsonaro (Liberal Party, PL), who are running in the second round, were already well known by the market, so there was no great surprise as for who the next president will be. “There are uncertainties, but they do not indicate a paradigm shift.”
Mr. Medeiros saw former Minister Henrique Meirelles’s nod as a “positive” development, as he is a free-market believer, and stressed that economists such as Arminio Fraga, Pérsio Arida and Edmar Bacha support Mr. Lula da Silva. “On the other hand, Bolsonaro is expected to keep a lean government policy, which was positive for the market,” he said.
According to Exchange B3, since the end of the first round, international investors have reduced their long dollar position by $3.7 billion, to $24.9 billion.
Ashmore remains positive on Brazilian assets. “With inflation coming under control now, more sustainable growth, and terms of trade more favorable for Brazil, there would need to be a very poorly management of the economic policy to hinder the recovery of local assets,” said Mr. Medeiros.
Kinea Investimentos has a similar view, and has made allocations in Brazilian assets rather than in international ones. “The picture of Brazil today against peers and developed countries is better. We have a primary surplus this year; the fiscal situation here is better than that of [Brazil’s] peers; the current account deficit is moderate and pretty much financed; and we are well advanced in the monetary policy cycle,” said Daniela Lima, Kinea’s economist for Brazil.
“The uncertainty today stems from who the next president will be,” she said. But, regardless of who is in office, “the incentives will be, at least at the beginning of the government, to have a more moderate fiscal agenda and a positive fiscal signal.” In Kinea’s monthly live-streaming event on hedge funds, Ms. Lima emphasized that Brazilian assets, in terms of valuation, are very attractive at the moment. Not coincidentally, the manager is long on the real and Brazil’s stock market, and holds short positions on inflation.
In this month’s letter, Kinea points out that the rationale for being long on the real “is a more proactive tactical view on Brazil, due to attractive interest rates, balanced external accounts, and our expectation that the next administration will have a reasonable fiscal stance at the beginning of its term.”
Although there is greater optimism with the real and other Brazilian assets, some market players still advocate greater caution with the currency. SulAmérica Investimentos, for example, has been trading the real in a more tactical way as there is still no good definition about the fiscal framework to be in effect as of 2023, against a backdrop of strong dollar abroad.
“We are living in a world of much greater uncertainty than we had before the pandemic,” said Alexandre Caldas da Cunha, senior manager of hedge funds at SulAmérica. “We think that if we have a better and more positive definition about how the economic guidelines of the new administration are going to be, whoever it may be, especially because the spending cap will change, there is potential for the real to appreciate. This, however, is not clear yet.”
He sees signs of improvement in the exchange rate, such as the rally seen in the trading session after the first round of the presidential elections. In just one day, the dollar lost more than 4% against the real. “But, at the current level of the dollar, considering the global scenario and the uncertainties here in Brazil, we don’t see great opportunities in the exchange rate at this moment,” he said.
Bruno Marques, a partner and manager of hedge funds at XP Asset Management, also believes that the exchange rate is not the best way to express a more constructive view of Brazil for the time being. During his monthly live-streamed event, Mr. Marques pointed out that the equilibrium exchange rate, which ranged between R$4.8 and R$4.9 to the dollar, has been converging to R$5.15. “We don’t see much of a premium in the exchange rate.”
*By Victor Rezende, Gabriel Roca — São Paulo
Source: Valor International