{"id":92477,"date":"2025-01-10T16:26:06","date_gmt":"2025-01-10T19:26:06","guid":{"rendered":"https:\/\/murray.adv.br\/?p=92477"},"modified":"2025-01-10T16:26:07","modified_gmt":"2025-01-10T19:26:07","slug":"local-investors-stay-bearish-but-take-tactical-approach-in-brazil","status":"publish","type":"post","link":"https:\/\/murray.adv.br\/en\/local-investors-stay-bearish-but-take-tactical-approach-in-brazil\/","title":{"rendered":"Local investors stay bearish but take tactical approach in Brazil"},"content":{"rendered":"\n
Price levels prompt only selective strategies among major asset managers, which remain cautious on domestic markets<\/em><\/h6>\n\n\n\n

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01\/10\/2025 <\/p>\n\n\n\n

Pessimism continues to dominate sentiment among key Brazilian asset managers, following a peak in negativity during November and December sparked by frustration over the government\u2019s spending review package. While the significant decline in domestic asset prices has made it less appealing to take new bearish positions, most firms are adopting a more cautious stance toward local markets. However, they maintain a defensive view on equities, the real, and local interest rates due to persistent concerns over Brazil\u2019s debt trajectory.<\/p>\n\n\n\n

\u201cThe government faces enormous difficulty in implementing measures to contain public spending, and the debt trajectory is unsustainable. We\u2019ve spent considerable time debating whether the cuts will be R$40 billion or R$70 billion, but the truth is that this discussion is far from addressing the scale of adjustment needed to put debt on a sustainable path. We should be aiming for a primary surplus of 2% to 2.5% of GDP,\u201d said Aurelio Bicalho, chief economist at Vinland Capital, during the firm\u2019s monthly call this week.<\/p>\n\n\n\n

Mr. Bicalho noted that as 2026 approaches, the presidential election will likely come into focus during the second half of the year. Investors will start assessing the current government\u2019s competitiveness for re-election amid an environment of economic slowdown, high inflation, and a restrictive benchmark Selic rate.<\/p>\n\n\n\n

In this context, Vinland Capital remains cautious on Brazil, according to portfolio manager Jos\u00e9 Monforte. \u201cThe root of the fiscal issue is not being addressed, which makes it very difficult to take any bullish position on Brazil. On the other hand, levels are important. We continue to hold a bullish bias in Brazil\u2019s interest rate curve, particularly in the longer term, starting with the DI (Interbank Deposit) contract for January 2027. In currencies, our bias remains long on the dollar against the euro, yen, and real,\u201d Mr. Monforte said.<\/p>\n\n\n\n

Ibi\u00fana Investimentos also pointed out that without an effective response to Brazil\u2019s fiscal challenges, the upward movement in the interest rate curve, the depreciation of the real, stock market weakness, and worsening inflation expectations are unlikely to have run their course. \u201cWe remain alert to any potential shift in fiscal adjustment strategy, but until we gain greater clarity, we maintain defensive positions in Brazilian assets,\u201d the firm\u2019s team noted in a December letter.<\/p>\n\n\n\n

Ibi\u00fana continues to hold bets on rising nominal interest rates and implicit inflation rates (extracted from public bonds), in addition to long positions on the dollar against a basket of currencies that includes the real.<\/p>\n\n\n\n

A similar approach is taken by Bruno Marques, co-manager of XP Asset Management\u2019s macro funds, who highlights two parallel issues in Brazil: the monetary outlook, where the Central Bank needs to raise interest rates further, and the fiscal scenario. \u201cThese two issues are not isolated, as one of the reasons the Central Bank needs to increase rates is the fiscal influence on economic activity. On the other hand, tighter monetary policy contributes to a rising debt-to-GDP ratio over the coming years,\u201d he said.<\/p>\n\n\n\n

Mr. Marques said XP Asset has closed its long positions on interest rates but maintains some that reflect a negative outlook on Brazilian assets, including bets on the dollar strengthening against the real and rising implicit inflation rates. \u201cWe remain very concerned about Brazil. Looking ahead, it\u2019s remarkable that even with all the deterioration seen in December, there has been no action from the government. If you\u2019d asked us three or four months ago what would happen if the dollar reached R$6, we would have said the government would definitely change its stance. We haven\u2019t seen anything close to that.\u201d<\/p>\n\n\n\n

Mr. Marques noted that recent statements from government officials and members of the economic team still lack a sense of urgency regarding price levels and market dynamics. \u201cThere\u2019s talk of improving communication or explaining better what the government is doing, but that\u2019s not the issue. There\u2019s a significant deterioration in the debt-to-GDP ratio with no sign that this will change.\u201d<\/p>\n\n\n\n

Rising rates<\/strong><\/p>\n\n\n\n

Pedro Dreux, partner and macro manager at Occam, pointed out the rapid deterioration in domestic asset prices observed in December, as markets priced in a Selic rate above 17% for 2025.<\/p>\n\n\n\n

\u201cAt this level of interest rates, we have no structural positions. While we believe the fundamentals will continue to deteriorate, it\u2019s not obvious to bet on rising interest rates at these levels,\u201d Mr. Dreux said. He added that volatility is likely to remain high and that the deteriorating environment remains challenging.<\/p>\n\n\n\n

\u201cThe signals from the government indicate that no structural measures on spending are forthcoming, and the market is beginning to realize that the adjustment to our debt will likely come via inflation,\u201d Mr. Dreux said during Occam\u2019s monthly call. For him, this raises the possibility of inflation reaching 7% or 8% this year.<\/p>\n\n\n\n

Verde Asset, led by Luis Stuhlberger, noted that the seasonal outflows of dollars in December were worsened by widespread pessimism among economic agents following the presentation of the fiscal package. The firm\u2019s management team explained that the Central Bank\u2019s large-scale foreign exchange interventions mitigated the immediate impact of these outflows but cautioned that such interventions cannot be sustained at the same pace going forward.<\/p>\n\n\n\n

\u201cThe inflationary impacts of currency depreciation will be felt throughout 2025 and will force the Central Bank to raise interest rates to levels we thought were long forgotten. The economic model of a fiscal accelerator with a monetary brake is heading straight for a wall. While the prices of many assets already include significant risk premiums, we continue to maintain a more negative stance,\u201d Verde Asset team said. They are holding short positions in equities and the real, along with a small bet on declining real interest rates.<\/p>\n\n\n\n

Other asset managers echoed negative views on Brazilian assets in their monthly letters. Bahia Asset Management disclosed that it maintains long positions on nominal and real interest rates and short positions on the real against a basket of currencies. Similarly, Opportunity Total took a short position on the real, arguing that the Central Bank\u2019s foreign exchange policy has temporarily distorted the price of the Brazilian currency, which \u201cstill faces weak fundamentals and relatively low carry in the short term.\u201d<\/p>\n\n\n\n

Kinea Investimentos is also holding short positions in the Brazilian stock market. \u201cThis reflects not only our view of the internal instability still present but also our negative outlook on emerging markets compared to the high real interest rates in the U.S. economy,\u201d the firm noted.<\/p>\n\n\n\n

Legacy Capital, meanwhile, maintains low exposure to the domestic market but expressed concern in its monthly letter about the Central Bank\u2019s accelerated pace of reserve sales. The firm also projects inflation of 6.2% for this year. <\/p>\n\n\n\n