Coup acts worry foreign investors, but less than Lula’s economic agenda

The coup acts promoted by supporters of former President Jair Bolsonaro (PL) this Sunday (8) were interpreted by foreign investors as a warning sign regarding the degree of political uncertainty that Brazil faces.

Averse to instability, they consider the episode worrying, but not as much as the directions that the government of Luiz Inácio Lula da Silva (PT) may take in the economic agenda, especially in its fiscal aspect.

In the evaluation of international investors and analysts heard by the Sheetalthough violent acts may weigh on the perception of risk in the short term, the focus on a broader horizon remains the macroeconomic scenario.

Reflecting this reading, the main indicators of the financial market practically did not react to the coup acts this Sunday. The Brazilian stock exchange closed stable (up 0.15%), while the dollar rose slightly (up 0.38%). Last Monday (2) —in the first trading session after Lula’s inauguration— the Ibovespa fell 3.06% and the dollar rose 1.47%, in a sign of discontent with the signals given by the new president in his speech.

In a message sent to clients this Monday, Nenad Dinic, equity strategist at Julius Baer, ​​a Swiss group with around 2.4 trillion reais in assets under management, said that the riots in Brasília caused uncertainty.

However, although he did not rule out the possibility that new violent protests could weigh on the market in the short term, he stated that investors’ focus remains on macroeconomic issues, especially on the design of Brazil’s new fiscal framework.

“We await further signs that the government will be able to allay the market’s fiscal concerns, which could lead to Brazilian equities gaining positive momentum,” he wrote.

The far-right acts that took place on Sunday were also mentioned in a report by Goldman Sachs. According to Wall Street’s financial institution, the unstable and deeply divided political environment, added to high social tension, keeps risk premiums high and may affect general governance.

“This implies that the new government, the opposition and the political class in general will have to work to heal the deep political crisis and social gaps opened during the campaign”, says the report.

Lucas de Aragão, a partner at Arko Advice, said he was approached by several investors from Sunday to Monday, from multinational companies with operations in Brazil to banks and funds that invest in the country.

“The first perception was very frightening”, he says. “Everyone worried [os atos golpistas] had some practical repercussions on the institutional framework of the country.”

According to him, over time, this concern dissipated, and one of the reasons was the conclusion that it was a disorganized act, without an institutional apparatus behind it. The agility of the Three Powers, companies and civil society associations in repudiating the movement also contributed, he assesses.

“Everyone who matters in the country criticized and distanced themselves from the acts. This somewhat protected the image of Brazilian institutionality”, he says.

As disturbing as it may be, says Aragão, Sunday’s episode was not seen as surprising by the financial market. Investors’ doubts continue to be about Lula’s relationship with Congress, discussions around a new fiscal framework, the Executive’s relationship with the Central Bank and the country’s fiscal framework.

Raymond Zcaro, director of investments at RVX Asset Management —a manager based in Florida—, says he sees the attacks that took place in Brasilia as one more reason for investors to take a break.

“Those who thought Lula would arrive more fiscally prudent now see that a tiger does not change its stripes. Adding this kind of political uncertainty, foreign investors will pause or even reduce their holdings in Brazil,” he says.

According to him, the country did well in 2022, which facilitates the decision to “make a profit and go to other countries with less noise”.

“In the funds I manage, I have reduced exposure to Brazil since the elections and, although the valuations [valuations] are cheaper now, I worry about the fiscal slippage that could weaken the real, causing damage to dollar-based portfolios”, he says.

Asked if he intends to further reduce his investments in Brazil after the coup acts, he reinforced that he had already reduced due to the electoral dispute. “Yesterday’s deeds [domingo] They tell me I did the right thing.”

Mario Sergio Lima, senior analyst for Medley Advisors on Brazil, sees no chance of Brazil suffering a foreign capital flight.

According to him, images of violence went around the world, which contributes to many international investors adopting a risk-averse behavior in relation to Brazil

However, he recalls that foreign investors have been more optimistic about the country than national investors.

“If the authorities succeed in satisfactorily repressing the radicalized right-wing terrorist groups, and we begin to see the blaming of those who carried out the acts, their financiers and political influencers, the climate of risk aversion may dissipate relatively quickly, limiting the greater impacts in the short term”, he says.

For William Jackson, from Capital Economics consultancy, the implications of the invasion of Congress are mainly political. “But the disturbances could result in a lasting risk premium on the country’s financial assets, particularly if they lead Lula to double down on his economic agenda,” he said.

According to him, the concerns in the economic area depend on some points. The first is whether this is a one-time or recurring event.

“If protests become more frequent and/or spread to more critical sectors, the economic costs would be greater. For example, when truck drivers (one of Bolsonaro’s main support bases) went on strike in 2018, there was a drop of 10% in industrial production and inflation increased by a few percentage points.”

The second question is what Lula’s reaction will be like. “The risk from an economic point of view is that this threat to his presidency will lead Lula to embrace the more leftist parts of his agenda (more Social Security spending, a greater role for the State in the economy and a reduction in the role of market forces), rather than seeking a compromise with their political opponents.”