Faria Lima makes a positive assessment 100 days in Lula’s government – 09/04/2023 – Market

The first 100 days of the Lula government in the economic area, completed this Monday (10), are classified by economists and fund managers in the financial market as relatively positive.

Although with some noise, among them the repeated criticism of the BC (Central Bank) and high interest rates and discussions about changes in the inflation target, the anticipation of the presentation of the new fiscal framework is seen as an important advance to address the debt trajectory market, seen by market specialists as one of the country’s main economic challenges.

Market agents also say that, if the economic team’s plans to reduce the government’s debt are confirmed, the BC may have room to start the cycle of cutting interest rates in the coming months, with a potential positive impact on stocks in the Stock Exchange.

According to Marcus Zanetti, manager of Kinea Investimentos, considering the market’s concerns about the conduct of the economy of a government at the beginning of its mandate with the desire to stimulate growth, the assessment of the first 100 days is, in general, positive.

“We see that the government is making an effort to seek fiscal sustainability”, says Zanetti, referring to the proposal contained in the fiscal framework presented by the Ministry of Finance, which imposes a limit on the growth of expenses.

“Relative to expectations, the fiscal framework surprised us positively”, says the expert.

He adds that, in addition to having anticipated the set of new fiscal rules, initially foreseen for the end of the semester, another point that he sees with good eyes is the fact that Minister Haddad and his team have achieved some shielding against pressures from within the party for a less rigorous fiscal proposal, which would have more room for increased spending.

“The economic area has shown itself to be well intentioned. Members of the Ministry of Finance, with emphasis on the [Fernando] haddad and the [Rogério] Ceron, have been a more thoughtful voice in search of balance and a good relationship with the financial market”, says Ricardo Cará, manager of EQI Asset’s multimarket funds. “They seem to understand that this is the way to create conditions for the BC reduce the interest rate consistently.”

The manager of EQI Asset also says that the announcement of the fiscal framework brought some relief to the market, due to investors’ fear that the proposal could be worse than the one presented.

“However, criticism of the Central Bank, the debate on changing the inflation target and the discussion of what is spent and what is investment are themes that have generated a lot of volatility and mistrust since the government was elected”, says Cará.

Economist at the manager AZ Quest, Alexandre Manoel says that, despite the various noises at the beginning of the government, the concrete measures adopted so far, with emphasis again on the fiscal framework, remove the biggest fear of the market, that the third term of president Lula could approach the visa in the government of ex-president Dilma Rousseff.

“The Ministry of Finance has not given any sign of resuming policies considered wrong by the [ex-presidente] dilma [Rousseff]. In fact, they are doing the opposite, with an agenda of removing subsidies”, says Manoel.

The AZ Quest economist says that the framework represents a structural break in a secular pattern of excess public spending and removes the risk of an explosive path for public debt.

He also claims that the economic team has not given signals that it intends to review advances considered important in recent years, such as the natural gas milestone, the sale of Petrobras assets or the privatization of Eletrobras.

“We had 100 days with noise, but at the same time, if we stick to the facts, it seems to us to be a government that is moving in the right direction on the fiscal side.”

Bets on falling interest rates and room for rising stocks on the stock exchange

Managers estimate that, in a scenario in which the government manages, in fact, to move forward with a fiscal policy capable of balancing public accounts, the BC may start the cycle of cutting the Selic rate later this year, with a potential positive impact for the economy and, consequently, for the performance of stocks on the stock exchange.

Zanetti, from Kinea, says that one of the main positions he carries in the portfolio of funds is betting on the drop in medium-term interest rates.

He explains that the interest rate curve, which embodies the expectations of agents for the Selic trajectory, indicates a series of cuts in the middle of this year, but with the BC resuming the process of increase in the following years due to an eventual persistent inflationary pressure . “We don’t think so,” says Zanetti. “We like to bet on the fall of these interest rates”, he adds.

“If the government succeeds in signaling to investors and society in general that the debt-to-GDP ratio tends to stay well behaved, it seems to me that the BC will start to drop interest rates this year”, says Alexandre Espírito Santo, chief economist at Órama , which does not rule out, in this scenario, the Selic ending the year at around 12%, going to a level of around 10% in 2024.

“If that happens, the country will grow significantly again, with a GDP growth of between 1.5% and 2% next year”, says the economist.

“With the framework structuring itself and gaining some credibility, the scenario of monetary easing begins to be established and certainly the prices of shares and the dollar tend to improve”, says Manoel, from AZ Quest.

Cará, from EQI Asset, says that he has a relative value bet in his multimarket portfolio, which predicts that emerging market exchanges, including the Brazilian one, should perform better than the United States.

“Out there, after the turmoil in the financial sector, it seems that the situation is calming down, but it is difficult to know the impacts on activity and inflation. Credit conditions have become more restrictive and developed central banks continue to tighten interest rates. delicate combination that deserves a lot of attention”, says the manager of EQI Asset.

Espírito Santo, from Órama, states that, for those investors who don’t like to take risks, fixed income remains, by far, the best alternative. He says that even if the BC starts the interest rate cut cycle, the expectation is that the Selic will remain at a high level — in the Focus bulletin, projections indicate the interest rate at 12.75% at the end of 2023. “As we think that interest rates will fall, having fixed rates seems like a good suggestion.”

As for that investor who accepts to take a little more risk in exchange for a higher return expectation, Órama’s chief economist says that the recommendation is to have an allocation between 10% and 15% of investments on the Stock Exchange.

“The Brazilian Stock Exchange has very attractive prices, one of the cheapest I’ve seen in my 35-year career in the market”, says Órama’s chief economist. “For those who like to take a little risk, going public doesn’t seem like a bad strategy.”

Managing partner at Legend Wealth Management, Ricardo Faria says that market prices move quickly at times when financial agents are affected by a feeling of greater optimism.

Therefore, if the investor has no exposure to the Stock Exchange, he runs the risk of missing out on a good part of the stock recovery movement, says Faria.

“There is a reasonable risk premium in the markets, and if the government has the capacity to address the bill in more detail [sobre o arcabouço fiscal]we can see a moment of appreciation of assets, with the stock market rising and interest rates showing some closing”, says Faria.

In line with peers, Faria claims that the fiscal framework paves the way for a debate on fiscal perspectives for the next four years. “Regardless of whether further information is needed, the fact that it has already been presented to society is a positive point.”