The beginning of 2023 has been marked by negative reactions from investors and high volatility in the markets, in the wake of the first signs of the government of Luiz Inácio Lula da Silva (PT) in the economic field.
A less liberal stance than expected, with indications coming from Brasilia of a greater state presence, has left financial agents wary.
In just the first week of the year, the Ibovespa stock index has already accumulated a devaluation of approximately 2%, even with the 2% rise this Thursday (5). The day’s recovery, however, was interpreted by specialists more as a one-off adjustment than as a structural trend with the strength to last for much longer.
“The market is scared and prices show it”, says José Tovar, CEO of resource manager Truxt.
Tovar says that, in general, the market was surprised, for the most part, by the composition of the economic team with a less liberal bias than expected.
He also claims that the financial market is not an entity that cheers against the government, but reacts quickly and in a herd to the very negative initial perception of Lula’s first days in the Presidency.
“There is a wing to the left that celebrates when the market is negative, which is absurd, because what we want is a growing economy, low inflation, fiscal responsibility”, says Tovar.
Truxt’s CEO also states that it is up to Lula to organize the house as quickly as possible, in order to avoid conflicting signals within the government itself.
He recalls that, over the last few weeks, there have been some signals exchanged between members of the government regarding changes in the Social Security reform, interventions at Petrobras and related to fuel exemption.
“Haddad’s opinion on the end of fuel tax relief was trampled by the political wing of the party”, says Tovar, who claims to have reduced the size of the fund manager’s positions on account of the news coming from Brasília, maintaining bets on the rise of the dollar and interest.
“The impression that remains is that the government is still lost on some issues and the market, as always, is very eager for definitions”, says Rafael Ihara, chief economist at manager Meraki Capital.
Ihara assesses that the government’s first signs on the economic agenda have been bad, whether due to the choice of team, spending or statements against privatizations and the spending ceiling.
“The scenario is not encouraging because Brazil, the United States and Europe are already showing clear signs of weakening activity. The job market will soon feel it. I believe that Lula is very worried about the approval, not wanting to repeat the case of [Gabriel] Boric in Chile”, says the Meraki economist, referring to the loss of popularity of the Chilean president a few months after his election.
“The chances of populist measures in this scenario increase”, he says.
Ihara also says that what can contribute to bring some relief to the macroeconomic framework for Brazil is China, with the process of reopening the economy in progress.
In any case, the economist points out that the environment is full of uncertainties and it makes sense to maintain a greater dose of caution with local assets.
Country will have higher interest rates for longer and will become poorer, say managers of 3R and ASA
Founding partner of 3R Investimentos, Tomás Awad says that he has even adopted a more cautious stance in the composition of equity fund portfolios.
He claims that he has prioritized shares from companies considered more resilient, which tend to navigate the period of political and economic uncertainty and higher interest rates better than the market average, such as the banking, health and food retail sectors.
“The country is going to get poorer, everyone is going to get poorer. In this scenario, there are many businesses that will get worse, but there are also some that should benefit”, says Awad, about betting on stock portfolios.
He adds that he has also kept a relevant portion of the resources in cash, yielding the CDI, the index that follows the Selic’s profitability, in order to take advantage of the prices on the Exchange, which he predicts will be cheaper in the future.
The 3R Investimentos partner says he has a pessimistic view of the prospects for the domestic scenario since Lula’s election, which was only reinforced more recently by the formation of the economic team. “She’s horrible. Hard to be worse,” says Awad.
Manager of ASA Investments, José Alberto Baltieri says that, until a few weeks ago, the majority expectation in the market, and also in the manager, was that the BC (Central Bank) would have room to initiate an interest rate cut at some point at the turn of the first to the second half of the year.
With the worsening in expectations of market agents about the fiscal situation after the government’s signals for the economy, now there are doubts as to whether the BC will be able to start the monetary tightening process later this year, says Baltieri.
He adds that, with the change in investor perception about the beginning of interest rate cuts, the view regarding the potential performance of the Exchange has also changed. The drop in interest rates could make room for a better performance of the shares, but the possible maintenance of the Selic at a high level for a longer time radically altered this expectation, says the ASA manager.
According to Baltieri, when it became clear that the government would not adopt the more pragmatic tone that part of the market expected, the option was to change the composition of the portfolio. Bets were reduced on shares of companies more susceptible to fluctuations in interest rates, such as civil construction and consumption, and reinforced on names that tend to do better regardless of the direction of the Selic, such as commodities and banks.
Managing partner and head of company analysis at the manager Apex Capital, Paulo Weickert says that he also sees commodity exporters such as Vale, possibly driven by the reopening of China, as one of the main bets in his portfolio at the moment.
Weickert says that, in the case of names more focused on the domestic economy, he has focused attention on theses whose performance depends less on the growth of the local economy, and more on the company’s own operational execution.
BB Seguridade, which has a strong presence in rural insurance and benefits from high interest rates for the profitability of financial investments held in cash, and the drug manufacturer Hypera, which should continue with heated sales regardless of the local scenario, are pointed out by the specialist. among the names in Apex funds that tend to stand out on the Exchange.
“The decisions taken by the government so far do not contribute to reducing uncertainty”, says Alexandre Bassoli, chief economist at Apex, who says he had the expectation that the government could adopt a more pragmatic tone, considering Lula’s history, in especially during his first term.
Foreign flow entry may not be repeated in 2023, says global manager abrdn
In 2022, when the Ibovespa rose by around 4.7%, the strong flow of foreign investors brought an important contribution to the performance of the Exchange, which reached the mark of R$ 120 billion in the year.
For 2023, however, this is a trend that may not be repeated again, says Eduardo Figueiredo, director of investment at global manager abrdn, which has around US$ 603.4 billion (R$ 3.2 trillion) in assets, with an allocation of approximately US$3 billion (R$16.2 billion) between equities and fixed income in Brazil.
Figueiredo claims that the strong inflow of foreign capital in recent months was less due to Brazil’s merits, and more due to the weaknesses of other emerging countries, such as Russia’s invasion of Ukraine and the real estate crisis in China.
For the year ahead, however, the risk of global recession, added to the uncertainties about the evolution of the political and economic scenario in Brazil, and the reopening of China, may hinder the entry of foreigners in the local stock market, says the director of abrdn. “We cannot look at the flow that has come up to now and think that it will continue indefinitely.”
In this scenario, Figueiredo says that he has favored names in the portfolio dedicated to Brazilian stocks that are less dependent on the country’s economic and political cycles, such as Raia Drogasil, Rumo and Totvs.
“The big doubt that still hangs over is whether what we are seeing is rhetoric with an electoral character or if it is really what will be adopted as a government policy”, says the director of abrdn, adding that he does not intend to increase his position in the Brazilian market while is not clear about the policies to be adopted in the tax area.
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