Brazilian stock market is cheap, says CEO of Bradesco manager

Ahead of Bradesco’s manager, Bram (Bradesco Asset Management), which has about R$540 billion in assets under management, Bruno Funchal believes that the Brazilian stock exchange is cheap.

The commodity and financial sectors are pointed out by the specialist among those in which he sees the best opportunities at the moment.

Funchal took office at the end of April, after leaving the post of former secretary of the National Treasury of the Bolsonaro government in October last year, amid discussions that culminated in an increase in public spending and non-compliance with the spending ceiling.

He believes that, despite the government’s fiscal maneuver, the spending ceiling continues to play an important role in maintaining a relatively balanced fiscal framework, with a reduction in the federal debt in relation to GDP (Gross Domestic Product).

“We can’t ignore the fact that expenses are under control, and that’s the spending ceiling working.”

A more austere conduct of fiscal policy in recent years, according to the expert, contributes to an increase in the power of monetary policy, preventing the country from having to live with interest rates at the same levels observed in past decades.

Bram’s CEO says he expects a slowdown in Brazilian inflation from the second half of the year, with the Selic rate at 13.75% at the end of the BC (Central Bank) monetary tightening cycle, bringing down the price level, but also with a negative impact on the pace of economic activity.

In the international scenario, the assessment is that, if the interest rate hike underway by the Federal Reserve (Fed, central bank of the United States) is not enough to cool the job market in the region, increases above those expected by the market today could necessary, with the risk of a new round of price adjustments for riskier assets on a global scale.

like mr. has followed the evolution of the macroeconomic scenario and for investments in recent months? In general, what drives growth and investments is the dynamics of inflation and interest rates. We have observed in Brazil and Latin American peers, and even in Europe and the United States, the growth of inflation always surprising upwards, and the natural reaction is the increase in interest rates, which is the instrument that the monetary authorities have to deal with. therefore.

We were in an environment of low interest rates and low inflation, when higher risk investments were preferred by investors looking for higher returns, such as hedge funds and variable income. With the high inflation and monetary tightening, a process that Brazil started before the others, we have some accommodation, with the migration of investors to fixed income.

We have some funds doing very well in this scenario, such as private credit, with performance above the CDI, in which we carry out a very rigorous selection process in relation to the risk of companies in order to extract the spread [prêmio em relação aos títulos públicos].

Will the rise in interest rates, in Brazil and abroad, tend to keep the stock markets under pressure for a while longer? When we look at the performance of the stock market, even though we have in the United States a contraction of the S&P 500 due to this interest rate increase by the Fed, here in Brazil we have seen the Stock Exchange relatively cheap compared to its peers, with important opportunities in sectors that have performed well.

Commodity prices are close to all-time highs, and more defensive sectors such as energy and financials are doing well. If we compare between classes, fixed income ends up being more attractive, but, even so, it does not eliminate the opportunities for good investments in variable income, mainly of a more defensive nature, since we still have many uncertainties about the monetary and electoral cycle.

How has the manager been following the Eletrobras privatization process? It’s worth getting into offer? We are interested, including launching two funds for investors who want to join the offer or migrate resources from Petrobras and Vale mutual funds. For the investor, it is yet another channel of diversification within a sector considered defensive. And even though the appreciation of Eletrobras shares in recent months may have a component of expectation, there has also been an important gain in efficiency since 2017, with a reduction in the cost structure and improvement in efficiency, which ends up being translated into the price.

What assessment did Mr. about premium levels in fixed income? Where are the best opportunities? The yield curve is quite high, and there is a premium within the class for investors to capture. However, we are not yet at the end of the monetary tightening cycle, and, because of that, we assess that there are opportunities, but that there will also be a lot of volatility.

We are still a little cautious about investing in fixed-rate securities, and we have been carrying a lighter position in our portfolios. What we have been looking at with great interest are inflation bonds, in order to be able to defend against this period of higher inflation. In private credit, we also have incentivized papers, which are able to benefit from high interest rates, with an additional spread in relation to public bonds, and which also benefit from tax exemption.

How far should the Selic rate rise to be able to control inflation? We project that the cycle will end the Selic at 13.75%. The increase in interest rates is a bitter medicine that has an effect on economic activity, but that will be reflected in a drop in inflation. It takes some time to have this effect, and we may have to wait a while to see the cycle of high interest rates reflect in the economy, and then we start to see an expansionary cycle of monetary policy.

An important discussion concerns the strength of monetary policy, which, in my view, has changed a lot. I think that today the power of monetary policy is much stronger, because it has a smaller presence of the State, with a fiscal policy that is much less expansionist. We have less credit directed via public banks, which was something that reduced the power of monetary policy.

In any case, much of Brazilian inflation is imported, the whole world has adopted an expansionary fiscal policy due to the pandemic, and we also had the issue of oil prices due to the war in Ukraine. These are variables that we cannot control.

Should we expect a more important deceleration of inflation, and of economic activity, as of the 2nd semester? I believe so, our projections go in that direction. As much as growth is surprising positively, inflation has also surprised upwards. But monetary policy is starting to take effect, and we project that inflation should end the year at 9.2%, which implies a fall in the second half of the year. And given the level of growth expected for the first half of the year, we should also see a drop in the acceleration of economic activity. I imagine that the effect starts to be felt in the second half of the year, and continues throughout 2023.

With the rise in the Selic, the dollar tends to depreciate even more or is already close to the point of balance? We expect the exchange rate for the end of the year to be around R$5, considering the result of the trade balance and the flow of foreign investors and capital in general. Of course there are short-term movements, but we don’t expect a big change from the exchange rate to what we’re seeing today. Now the whole world is raising interest rates, so the tendency is that this will end up stabilizing, with the country’s interest rate differential decreasing.

What is the view of Mr. about the country’s fiscal framework? The inspector has surprised. We’ve had some good news since late last year. Revenue has been performing well, with successive real gains and with an effect on last year’s growth. The rise in commodities and inflation contributed to boost revenue.

Nor can we ignore the fact that expenses are under control, and that is the spending ceiling working. As much as they had all the arguments last year [que culminaram no descumprimento do teto], still, there is a limit to the expenses. In the past, when we had an increase in revenue, expenditure went up along with it, but not now, there is an increase in expenditure defined by the ceiling, and the result of this is that we have seen an improvement in the primary surplus to around 1.5% of GDP.

In the middle of the pandemic, when I was at the Treasury, we did a review that indicated that we would only have a surplus again in 2027, and this was brought forward to 2022. Revenue increased, the ceiling controlled expenses, which was reflected in an improvement in the accounts public. The most recent data released by the BC indicated a gross debt of 78% of GDP, at a level very similar to the pre-pandemic period. Brazil was one of the countries that most managed to reduce debt in relation to GDP during the pandemic. Until recently, there was talk of a debt above 100% of GDP, and today it is below 80%. The most important debate now is from 2023 onwards, as it will be from next year onwards.

The market still seems to feed hope for the third way, what is Bram’s vision? The third way is super relevant to foment the debate on which agenda we want. In this electoral period, the more relevant people are contributing to a future agenda for our country, this is the great gain. I understand that a third way can qualify this debate. More than choosing A or B, we need to understand what the proposals are, and what we want for our country, what the objectives are and how they will be implemented.

Among the two main competitors, which should have a more positive impact on the economy and the market? It is difficult to speak at this moment, because it still has yet to really enter into the debate, which has not started so far. We first need to know each one’s agenda, after that it’s easier to talk.

What Brazil needs is a productivity and growth agenda. The country has been stuck with low growth for a long time. Since the 1980s, per capita growth of around 0.5% per year is very low. How can we break this? With increased productivity. Therefore, greater clarity is needed on what measures will be adopted to increase productivity, and how they will be implemented.

What impact can the Fed’s interest rate hike still have on the global economy? The American economy is very heated, with a very strong job market. If we don’t see any movement to slow down the labor market in the region, the Fed will probably have to accelerate the pace of monetary tightening and we will have a new round of revisions in asset prices. Invariably, an economic slowdown will come, because it is the way to control inflation. The point of attention is how big this slowdown will be, and the time frame in which it will happen.

In the short term, the US interest rate may go to 3%, maybe even stay a little above that, precisely to be able to slow down US inflation, which is under considerable pressure. It will not be a simple job to put inflation in the United States at levels close to 2% per year. I don’t know if we will have a global recession as a result, but a slowdown is very likely next year.

X-RAY | BRUNO FUNCHAL, 43

CEO of Bradesco Asset Management, Bruno Funchal holds a PhD in Economics from FGV (Fundação Getulio Vargas) and a postdoctoral degree from IMPA (National Institute of Pure and Applied Mathematics). He was Secretary of the National Treasury between July 2020 and October 2021, and Secretary of Finance of Espírito Santo from February 2017 until December 2018.