Investors are buying the dip in Brazil’s stock market as the nation’s hyper-aggressive central bank warms to the idea of easing painfully high interest rates.
(Bloomberg) — Investors are buying the dip in Brazil’s stock market as the nation’s hyper-aggressive central bank warms to the idea of easing painfully high interest rates.
Fidelity Investments and a smattering of local hedge funds are adding exposure to shares from Latin America’s largest economy, convinced that lower borrowing costs will accelerate corporate growth — just as President Luiz Inacio Lula da Silva’s new fiscal framework edges closer to reality.
“I am more positive on Brazil than I have been in recent years,” said Will Pruett, a portfolio manager at Fidelity in Boston who managed $7.5 billion of emerging assets as of the end of April. “Declining rates in Brazil may be hugely important to performance of that equity market.”
While Brazilian shares are outperforming emerging-market peers, they’ve still fallen about 10% over the past two years as policymakers embarked on one of the world’s earlier and most-aggressive tightening cycles. But with valuations well below historical averages and rate cuts on the horizon, money managers expect the market to start to rally.
Central bank chief Roberto Campos Neto — amid criticism from Lula — signaled this week that falling inflation expectations may pave the way for lower rates, spurring investor optimism across Brazilian asset classes. Swaps traders are already pricing in a monetary easing of more than 170 basis points by the end of the year.
Expectations have also been mounting for the Federal Reserve and other major central banks to soon reach peaks in their tightening cycles, spurring bullish views on broader emerging markets.
Short sellers are signaling it’s time to stop betting against developing-economy shares more broadly, with US policymakers widely seen leaving their key rate on hold on Wednesday and reaching a peak rate sometime in 2023.
The Ibovespa climbed as much as 1.7% in Sao Paulo Wednesday, compared to a 0.2% increase in MSCI’s benchmark for broader developing-nation equities.
Buying in Brazil
Ten months after Brazilian policymakers capped off a dozen rapid-fire rate hikes by pinning benchmark rates at 13.75%, Fidelity’s Pruett sees a silver lining in lower corporate debt loads. He’s favoring the nation’s equities in his Latin America portfolio, eyeing companies with healthier balance sheets and attractive valuation metrics.
Others on Wall Street have had a similar idea. Investors in US-based exchange-traded funds poured $175.7 million into Brazilian equities in the week ended June 9, according to data compiled by Bloomberg.
Almost 70% of Latin American money managers surveyed by Bank of America Corp. expect the Ibovespa to end the year above 120,000 points — implying a roughly 3% gain from current levels. Most of the money managers surveyed see Brazilian policymakers starting to cut rates in August.
Local hedge funds are also beginning to get in on the enthusiasm. Legacy Capital scrapped its bearish wagers against Brazilian stocks in anticipation of a rate cut, while Verde Asset Management is prepared for further gains in Brazilian stocks, with its flagship fund keeping about a fifth of its portfolio invested in local equities.
Bahia Asset Management, meanwhile, has been building long positions on the Ibovespa index using options rather than outright cash in its hedge fund. The firm’s stock funds are boosting exposure to names more sensitive to falling interest rates, according to Diego Carvalho, a partner and equity funds director at Bahia.
Bahia is expecting the Ibovespa to finish the year at 139,000, and has been favoring names including car-rental firm Localiza Rent a Car SA, shoemaker Arezzo Industria e Comercio SA and gym operator Smartfit Escola de Ginastica e Danca SA.
While there’s already some relief surrounding the administration’s fiscal framework, which cleared a key step in the country’s lower house last month, he said, it could take longer for stocks to see a sustained rebound.
“There has been an inflection,” Carvalho said. “But only time will tell whether that is perennial.”
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