Opinion – Vinicius Torres Freire: ‘Is Lula the Salvador of Brazil?’, asks the market

“Is Lula Brazil’s Savior?”, in the original, is the title of a report published this week by the Canadian-based international consultancy BCA, which advises clients on what to do with money in emerging markets. No, Lula is not.

But, for the strategists of the BCA, it is possible to win some tutu if a “centrist” Lula is elected president, given the fact that “Brazil is cheap”. That is, on average, the shares have a low value, considering the history and returns of the companies. Bonds are cheap, another way of saying interest rates are high.

To give a more “pop” example. The lady and gentleman who are interested in Treasury Direct must have noticed that there are government bonds maturing in 2026 paying 5.21% per year in addition to inflation; in 2035, 5.61% more IPCA. This is a shame, a recipe for government and country to go to hell. But let’s go.

The fact is that there are reasonable people who think long-term bond rates will fall (bond prices will rise), an opportunity for a good shot of reasonable speculation. In a situation where the financial debacle (interest and dollar) was much greater, that’s what smart people did between 2002, the year of the election, and 2003, the first of Lula 1, filling their asses.

The recent decline in the dollar price and the inflow of non-resident (“foreign”) money into the financial market suggest that BCA is not alone in this assessment. It really isn’t, you hear it in private conversations, in seminars by big money managers and you read it in articles that market analysts publish in newspapers.

There is a wave in favor of emerging markets in general, but the real was the currency that appreciated the most from December to February among the 38 currencies monitored by the IMF. Even so, it was the one that lost the most value since the beginning of the epidemic (since February 2020) and BCA does not believe in a relevant appreciation of the real.

Incidentally, the less demagoguery Congress is willing to do, the greater the chances of holding the dollar and inflation. This Wednesday, deputies said they were “astonished” by the bad reaction to the tax reduction and debt increase package; who received messages from “the market” stating that the demagogic shot would backfire or lead to greater bullshit.

As Jair Bolsonaro tends to become a “lame duck” or would be on the verge of drinking cold coffee, to use the national metaphor, the owners of the money would be paying more attention to what Lula will or promises to do. For now, Lula promises conciliation and moderation. The more so, the more money would come in.

It wouldn’t be a torrent, not least because emerging countries can get hit with the rise in interest rates in the US, not to mention their domestic problems. Brazil, its economy and its economic policy are doing badly. But for the next few months, its financial assets may yield more than comparable alternatives, the so-called emerging countries. That’s it. It is the most common argument, a resigned boredom, illuminated here and there by the possibility of earning some money.

Consider the BCA scenario, for example. The perspective is that the first half of the Lula 3 government will be “moderate”. But there would be no profound structural changes (“reforms”) that would accelerate growth and enough measures to control public debt, at least conventional ones. Towards the end of the government, Lula would relax and try to control the increase in debt with some variant of what is called “financial repression”. Real interest rates would be low (also with higher inflation), the real would depreciate and Brazil would continue to kind of flounder in the mud, but with its nose a little above the quagmire.