While some of Wall Street’s largest banks are urging clients to make bullish bets on Brazil, local hedge funds are steering clear, with firms including Verde Asset Management and Ibiuna Investimentos maintaining their bets on a weaker Brazilian real, according to a report by Bloomberg.
Local fund managers argue that even with the Federal Reserve’s anticipated first rate cut in four years, Brazil’s fiscal outlook remains bleak. Gustavo Pessoa, founding partner at Legacy Capital, which manages approximately BRL20bn ($3.6bn), points to the government’s eagerness to increase spending as a major factor contributing to persistent inflation.
“There’s nothing suggesting that the fiscal outlook is improving,” said Pessoa. “The government is signalling it’s eager to spend, and inflation is unlikely to be tamed quickly.”
This caution stands in stark contrast to the optimism among foreign strategists. Banks including Barclays Plc, Morgan Stanley, Bank of America, and UBS Group AG have recently been advocating for bullish positions, especially on Brazil’s real. Some foreign investors argue that the worst fiscal news is already priced into the market, and a potential short-lived tightening cycle could create opportunities.
“Price action has challenged our views, but the trade is cheap to hold and levels are attractive for deep buyers to add exposure,” UBS strategists, including Manik Narain, said in a note on 9 September.
Despite this optimism though, Brazilian markets have underperformed in 2023, with the real losing more than 11% against a basket of 16 major currencies. Additionally, swap-rate contracts have surged by 200 basis points in some areas, highlighting local concerns about the country’s fiscal health.
