Lack of consensus at Monetary Policy Committee, fiscal concerns, change in Petrobras increase risk perception

05/31/2024

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André Leite — Foto: Divulgação

Investments linked to the Selic policy interest rate and CDI (the interbank deposit rate, used as an investment benchmark in Brazil) remain the main highlights in 2024. A month before the end of the year’s first half, assets regarded as risky, such as the stock market, multimarket and real-estate funds in Brazil had little chance among investors, with the Selic paying comfortable double-digit yields, at 10.5% per year. The depreciation of the real also provided a good return for those investing in the dollar or holding international assets with no currency hedge.

With further interest rate cuts by the U.S. Federal Reserve seen as less likely to occur and the slowdown in the pace of monetary easing in Brazil, the benchmark stock index Ibovespa posted losses of 2.55% in May, until the 29th, and 8.55% in the year. In the first five months of 2024, the index that tracks shares in the real estate segment showed the worst performance (-16.81%), followed by small caps traded on the stock exchange (-13.89%).

The exchange rate was 0.30% up in May and 7.33% in the year.

In fixed income, the IMA-B 5 index, comprised of inflation-indexed bonds adjusted by the Extended Consumer Price Index (IPCA) maturing in up to five years, were 0.94% up in the month and 2.81% in the year. They were still below the 4.39% CDI return since January. Debentures linked to the CDI were showing better performance, with 5.72% in the year, according to the Brazilian Financial and Capital Markets Association (ANBIMA) index.

In the international market, the S&P 500 was 9.8% up, while the Nasdaq rose 10.9% until Thursday (30) when markets in Brazil were closed due to a national holiday.

The United States has been the world’s main capital attractor, via direct and financial investment. At the same time, Brazil has disappointed investors since the government reduced its fiscal surplus target, as proposed in the 2025 budget.

“The market realized what was happening from the second half of April onwards. On the international front, there is no clear horizon for the Fed to cut interest rates, with an impact not only in the Brazilian monetary policy but for emerging markets in general,” said André Leite, chief investment officer at TAG Investimentos. “And we can’t say the government has surprised [the market] with a worse fiscal situation. It was already bad, with little [adjustments] on spending and a very high tax burden.”

Amid concerns about public accounts, Brazilian assets missed the favorable wave seen in some emerging markets in May—and even in developed economies—with a weak performance by the real and Brazilian shares, plus an increase in interest rates. The consequences of the floods in Rio Grande do Sul added uncertainty both on the fiscal side, due to the funds needed to rebuild the state, and on the monetary side, due to expected impacts on inflation.

Mr. Leite points out that Brazil is not a “guy with savings.” He said the country is more like “a guy who owes money and now has a disaster bill to pay, which explains its detachment from the rest of the world.”

The executive says that, in the composition of portfolios, both for individual and institutional investors, the year started with part of the assets allocated in dollars, with no hedge—with direct exposure to the U.S. currency. He sought a return of the exchange rate variation plus 4% in the long term, similar to that of the CDI, but with no relation to Brazilian assets. “In a bad moment, it helps part of the portfolio, reduces volatility, and is paying part of the [performance] bill.”

With artificial intelligence and incentive policies for the construction of microprocessor plants in the U.S., there is a reallocation of capital to the country, both via direct investments and financial assets, through the stock exchange or fixed income. The weak dollar thesis was not confirmed, the executive said. The spread between local and international interest rates, which was once 6 to 8 percentage points, is now close to 4, which is considered insufficient to encourage arbitrage operations.

In the speculative flow towards emerging markets, Mexico has stood out, while the Chilean currency has excelled thanks to the high demand for copper, a raw material with limited supply, Mr. Leite points out. The thesis can be seen in TAG’s portfolio.

The executive said that as rates paid by Tesouro IPCA+, an inflation-indexed National Treasury note (NTN-B) rose, TAG increased its exposure, favoring tax-exempt securities in the conservative portion of the portfolio. The asset manager has taken advantage of opportunities in structured credit, with a good level of guarantees, with interest rates between 3% and 5% above the CDI. The stock market, in turn, lacks the strength to gain traction. With high interest rates, local or international flows with a speculative profile are not expected to come.

At Portofino Multifamily Office, the bias is towards bonds and corporate debt, according to CIO Eduardo Castro. That applies both to Brazil and international assets.

“Interest rates are being kept high [in the U.S.] because activity is strong, which benefits companies’ results,” Mr. Castro points out. With surprises in the top and bottom lines, high-yield companies’ spread (to sovereign rates) is close to the lowest levels in 10 years. However, “the quality of companies, in general, was not affected by the recession, a prevailing narrative 12 months ago.”

According to the executive, the Brazilian stock exchange needs a trigger to adjust prices, no matter how cheap the assets may be. Considering price, macro scenario, and flow, the last two aspects do not allow a reaction. “With the real interest rate of NTN-B above 6%, pension funds are unlikely to increase allocation,” Mr. Castro adds. “For individuals, the same applies, as, in recent years, investors have been hurt by the stock market’s performance.”

In the international market, with interest rates around 5% per year and the U.S. stock market posting good returns, foreign investors are not willing to change geography. Mr. Castro points out that indices in the U.S. are no longer driven by the so-called magnificent seven—Alphabet (owner of Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. According to the executive, there is dispersion to other names outside the tech industry.

“It has really appreciated, it may seem expensive if we compare the valuation with the 10-year history, but there were important changes in the sector, including technology and investment theses. Some cases could demand higher multiples, such as Nvidia,” Mr. Castro said. “Given the differences in risk, allocation, geography, and concentration between the Brazilian and U.S. stock exchanges, we prefer the U.S.”

In the Brazilian market, the preference is for floating-rate bonds as a way to benefit from the double-digit annualized carry, with an additional over the CDI. The executive favors structured credit rather than triple-A, liquid one in large issues.

“The premium for this type of company is relatively low, there is an imbalance among market agents, the originating bank, the borrowing company, and investors, which is the weakest side,” Mr. Castro points out. “Tax-exempt debentures are a good example. Some securities are paying [the yield] of the NTN-B with no additional interest rates, just because of tax exemption. In a normal market, there is a risk of increasing such spread [with the assets’ devaluation].”

However, there is no rush to invest in inflation-indexed government bonds. Although the NTN-B at 6% may be a promising starting point as, in two or three years it will likely outperform the CDI, amid the current concerns about the monetary cycle and inflation, investors would rather postpone taking that risk. “The market is pricing in inflation unanchoring, whether due to discussions about the change in leadership at the Central Bank, the division of votes [in the Monetary Policy Committee], or a slightly worse inflation combined with rising commodities.”

The lack of consensus at the last COPOM meeting, with 5 versus 4 votes for reducing the Selic by 25 basis points and 50 basis points, brought forward the debate on who will replace Roberto Campos Neto as the Central Bank president, said Evandro Buccini, partner and director of credit and multimarket management at Rio Bravo Investimentos. “It has coincided with a turbulent moment also in the U.S. monetary policy, and with the change of command at Petrobras. So, for yet another month, the Brazilian stock market was outperformed by the U.S., with the S&P 500 rising sharply.”

Mr. Buccini points out that, given the negative reactions, the COPOM will seek greater consensus at the next meeting. “It will be interesting to follow the topic and see if it [a consensus] is credible or if it will just convey the idea of a temporary truce.” In any case, he sees a troubled succession as it will be hard to find an independent name appointed by President Lula as it was in the Bolsonaro administration. “There is almost consensus that it will be someone more dovish. This matter will remain around and will only be resolved at the end of the year.”

Rio Bravo’s projection for the Selic was revised to 10% per year from 9.75% by December, with great debate and a lot of noise about fiscal policy expected along the way. The executive mentions that the launch of development bills could indicate a more active Brazilian Development Bank (BNDES) in the coming years, allowing operations below the cost of capital and bringing distortions to private funding.

The firm’s funds have more cash available, including loans and equity. “With 10% [of the CDI], we are happy to carry it and there is no rush to allocate the money.” For individual investors, Mr. Buccini points out that strategies linked to real interest rates may be a good choice. “It could increase further if everything goes wrong and it becomes 7%, but ensuring the IPCA plus 6% in the medium and long terms is very good, especially for investors with access to tax-exempt debentures.”

*Por Adriana Cotias — São Paulo

Source: Valor International

https://valorinternational.globo.com/