Brazil well in the picture – 02/09/2023 – Ana Paula Vescovi

Brazil is better in the picture and is no longer the focus of investor concerns —now more attentive to external uncertainties. This was the feeling we captured at our 24th Conference in Brazil, held on August 22nd and 23rd. There were several panels with public and private managers and leading analysts. More than 650 institutional investors, from local and international funds, participated, and more than 100 companies were represented at bilateral meetings, in addition to hundreds of private clients.

As important as promoting conversation circles and bringing relevant information to investors was capturing their sentiment on the main topics that tend to move the markets in the short and medium term.

Both in conversations and in a broad survey carried out among the participants, we captured a predominantly positive feeling in relation to Brazil. In short, perceptions became more constructive as the political environment calmed down. Hence the intention to expand investments in variable income in the second semester, expressed by the majority (65%) of the participants.

The government has brought some focus to structural reforms, specifically tax and the fiscal framework. The general tone was one of expectations of increased competitiveness and efficiency, which included the action of subnational entities with privatization programs and investments in infrastructure.

As positive points of the scenario for Brazil, the healthy external accounts, the growth of agribusiness and the resilience of Brazilian companies in the face of high interest rates were highlighted. Brazil is just beginning its basic interest rate easing cycle, and this would be a antecedent factor for favoring equities as an asset class and for a reheating of the capital market, with the return of public offerings of shares, for example.

Concerns remain with political coordination and with the direction of fiscal adjustment. The expectation of a longer recovery in activity and the high level of household indebtedness are seen as potential risks. Most consumer companies mentioned a still challenging sales performance in the third quarter. In addition, uncertainties regarding the likely increase in taxes and the change in credit card lending regulations were among the most discussed topics.

The energy transition was also a theme with a lot of emphasis. Investors believe that Brazil has many opportunities, and may even support the decarbonization of other countries, but some challenges will need to be overcome.

Among the opportunities for Brazil in the energy transition, the following stand out: 1) the relevance of renewable energies in the energy matrix; 2) the ability to generate carbon credits to meet the global demand for offsets; 3) the enormous potential to produce green hydrogen; 4) the ability to supply the world with sustainably produced agricultural products; 5) the large reserves of essential minerals for the transition, such as nickel, cobalt and lithium; and 6) the potential for biofuel production, for use in energy generation and sustainable aviation fuel (SAF).

On the negative side, Brazil needs to address and monitor illegal deforestation. The country is also lagging behind in publishing regulations regarding the internal carbon market and green hydrogen production compared to other emerging markets.

It was interesting to hear economists say that it is still difficult to predict the impact of extreme weather events and climate change on local and global economies, especially on growth. However, their view is that Brazil will play an important role in the global energy transition, being able to export low-carbon oil, clean energy and agricultural products, which could allow for an increase in the country’s potential GDP.

The global scenario is currently the main concern. In particular, China’s macroeconomic prospects and high US interest rates are challenging, which made some foreigners more cautious than locals in relation to the rebate of these risks on emerging countries —a situation opposite to that observed just three months ago.

The slowdown of the Chinese economy and the lack of visibility about potential government stimuli were concerns that could have negative repercussions here, since that country represents more than 20% of our exports. However, investors recognized that Brazil has developed a stronger domestic economy and therefore should be less impacted by the eventual slowdown of the largest Asian economy.

Furthermore, there was increased talk of international funds launching ex-China emerging funds, or limiting exposure to China, which could “protect” Latin America from any flow of negative news regarding the economic slowdown or possible problems in that country.

Many investors believe that the Fed (Federal Reserve, the American central bank) will reduce interest rates only in the second half of 2024, which brought the discussion about the performance of the real, in view of a lower interest rate differential between the Brazil and the USA.

The investors we talked to seem confident that the fundamentals of monetary policy will be sustained, as they don’t see the real depreciating sharply ahead. However, they bear in mind that 7 out of 9 Central Bank directors will change by the end of December 2024, and cutting interest rates for the wrong reasons could lead to an unfavorable performance for the real, with more inflationary pressures ahead.

There are plenty of reasons, therefore, to keep our radars on for the global economy, but also to observe whether Brazil will continue to walk the path of maintaining high investor confidence.

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