Economist sees unprecedented shock increasing global uncertainties with repercussions in Brazil
04/07/2025
Santander Asset Management has adopted a defensive stance on global assets and is taking a tactical approach to domestic markets amid heightened uncertainty prompted by the “unprecedented shock” from the sweeping tariff hike announced by the United States, said Chief Economist and Strategist Eduardo Jarra. In an interview with Valor, Mr. Jarra expressed concerns about the potential impact of the tariffs on global economic activity and noted that repercussions could be felt in Brazil—possibly leading the Central Bank to end its interest rate tightening cycle earlier than expected.
The following are key excerpts from the interview:
Valor: What’s your assessment of the global outlook now that the Trump administration has announced new tariffs?
Eduardo Jarra: We’re dealing with a situation that has no recent historical precedent. Typically, in our analysis, we rely on past events as a reference to understand how markets and economies might react. This time, there’s no roadmap; we’re operating on assumptions. We had marked April 2 as a key date to get more clarity, but the announcement surprised markets with its scale and timing.
Valor: What kind of tariff levels had you anticipated?
Mr. Jarra: Like most of the market, we were expecting something in the 10% to 15% range. Therefore, the announcement was surprising not just in terms of size but also in terms of the rationale behind it. By April 2, the picture was very different from what we had imagined. At least we now have clarity on what the tariffs look like. The uncertainties now revolve around how other countries will respond and whether there’s any room left for negotiation. That has left us in a highly uncertain environment, and we’ve adopted a more defensive management stance. We’ve shifted to a defensive management mode.
Valor: Has Santander Asset shifted to more defensive assets?
Mr. Jarra: I’d say we’ve moved toward more defensive positioning rather than specific defensive assets. Given that we saw this as a significant event, we had already begun reducing risk across portfolios. After the announcement, we still believe that de-risking was the right move. We’re now navigating more uncharted territory. China responded with a 34% tariff on U.S. goods—a strong reaction that immediately impacted markets. We’ll have to wait and see how the U.S. responds. Is this the end of the escalation or just the beginning? Given the magnitude of the U.S. tariffs, is there still room to negotiate? In an environment with this much uncertainty, we believe the prudent approach is to wait, digest the information, and observe how key players act. It’s too early to take positions based on hypotheticals.
Valor: Can we already assess any concrete economic impact from the tariffs?
Mr. Jarra: We knew that a tariff shock would likely lead to slower growth and higher inflation. Now, we’ll try to gauge the magnitude of those effects. The problem is that we still don’t have a full picture—retaliatory measures from other countries are still unfolding. U.S. inflation will rise as import prices climb. However, the spike in uncertainty is also likely to make companies pause investment decisions, possibly leading to reduced capital expenditures. Consumer purchasing power will also be hit. On top of that, we need to consider the impact on financial markets since a significant portion of Americans’ savings are in equities. And don’t forget supply chains. What does this disruption mean for corporate production structures? That concerns me more than inflation.
Valor: Could the U.S. be heading for a recession?
Mr. Jarra: The probability has increased. We need more data to know how much more likely it is now, but yes, the risk has risen. The real question now is how severe the U.S. slowdown will be. If conditions remain roughly as they are, I believe the focus will shift more toward growth concerns, which will eventually lead to rate-cut discussions.
Valor: Have you changed your outlook for Federal Reserve rate cuts?
Mr. Jarra: We were projecting two 25-basis-point cuts this year and two more in 2026. I’m still comfortable with that forecast for this year. From here, the question is whether there’s room for additional cuts in 2025—perhaps bringing forward some of the easing we expected next year.
Valor: How is your global portfolio positioned now?
Mr. Jarra: We started the year optimistic about the U.S., driven by strong economic data and the tech sector. Even with elevated valuations, there was a compelling case for U.S. “exceptionalism.” However, with rising uncertainty around the U.S., and with fiscal stimulus in Europe and promising developments in Chinese tech, we began diversifying our global equity exposure geographically. Even before the tariff announcement, we were already becoming more defensive. Today, our global exposure is significantly lower—neutral or close to it, depending on the portfolio. As we continue to assess the post-announcement landscape, we’re maintaining that defensive posture and plan to revisit our strategy once things settle.
Valor: Given the weaker U.S. growth outlook, are you allocating to U.S. fixed income?
Mr. Jarra: Not through a directional bet. That said, we’ve been combining U.S. fixed income with our global equity risk bucket. We like U.S. fixed income as a complementary asset within our risk allocation framework, though not as a standalone opportunity. Our current stance is neutral.
Valor: Does this defensive stance also apply to Brazilian markets?
Mr. Jarra: We’re also holding neutral positions across all asset classes in Brazil. However, we’re actively managing the portfolios with a more tactical eye, looking for short-term opportunities. It’s a tactical allocation strategy that remains close to neutral overall.
Valor: The market had been concerned about a sharper slowdown in Brazil. Has that changed?
Mr. Jarra: We still project 2% GDP growth for this year and 1.5% for next. The economy is generally unfolding as expected. The first quarter was strong, largely due to agribusiness, and the labor market remains tight, providing a tailwind. That momentum should moderate in Q2 as the agribusiness’s impact fades. For the second half of the year, the restrictive monetary policy should lead to a more noticeable deceleration.
Valor: Are any of the government’s stimulus policies likely to offset this slowdown?
Mr. Jarra: We’ve already factored in measures like expanded payroll-deductible credit and the proposed income tax exemption. Based on current information, we believe the Central Bank is nearing the end of its tightening cycle. The economy appears to be entering a gradual slowdown. If new data changes the picture, we’ll reassess.
Valor: Is there any bias in your GDP outlook?
Mr. Jarra: Given the current strength in the labor market and agribusiness—and some uncertainty around fiscal stimulus—the bias is to the upside. Two downside risks remain: first, the lagged impact of restrictive monetary policy; second, the global backdrop, which has become more concerning and could influence the Central Bank’s decisions moving forward.
Valor: Could that lead to an earlier start to a rate-cutting cycle?
Mr. Jarra: Right now, we’re more focused on the current cycle coming to an end. Given the global developments, the probability of ending the cycle with the Selic policy interest rate at 14.75% has increased—this is our base case. If the global economy slows but avoids a more serious disruption, the external environment could help ease Brazil’s economic deceleration. That would provide room for the monetary authority to hold rates steady at 14.75% or 15.25% and monitor the effects. In that scenario, the global factor could tilt the odds in favor of rate cuts starting in 2026. But as things stand today, Brazil still seems far from any discussion of an early start to easing this year.
*By Arthur Cagliari and Victor Rezende — São Paulo
Source: Valor International