RIO DE JANEIRO, BRAZIL – With the monetary tightening cycle in Latin American countries more advanced than in developed economies, fixed income securities issued by governments and companies of these nations have gained space in the portfolios of renowned American manager BlackRock.
In an interview last Friday, July 8, Axel Christensen, director of investment strategy for Latin America at BlackRock, pointed out that the return offered by government bonds and corporate bonds from Brazil and other Latin American countries, such as Mexico and Colombia, “exceeds the risk”.
For the director, as the central banks of these countries are closer to the end than the beginning of the monetary tightening cycle, there is a lower risk that rates will rise much more. Therefore, there is less uncertainty about the posture of the monetary authorities.
Although there has been a recent devaluation in the price of commodities and the Brazilian currency, Christensen expects that the global energy transition process will benefit commodities, which may also help Latin American countries that are more intensive in raw materials, such as Brazil.
In the executive’s evaluation, the rise in commodity prices should allow these nations to have greater stability than seen in other interest rate hike cycles made by the Federal Reserve (Fed), the American central bank, in the past.
The views are part of the Midyear Outlook Virtual Media Roundtable, a document written by some executives of the management company, with the prospects for the second half of this year anticipated to InfoMoney.
In the document, the house’s specialists pointed out that they have above-market average allocations in emerging market fixed income securities in local currency. “High yields already reflect the tightening of monetary policy measures in emerging countries, which, in our view, offers an offset to inflation risk,” they said.
Optimism is also higher with global corporate bonds, which have been revised upward and now represent overweight positions in BlackRock’s portfolios. According to Christensen, the premium received by investors when investing in corporate bonds looks quite attractive.
The preference, however, is for companies with stronger balance sheets and higher credit quality, says the executive. “We believe there is a good opportunity in terms of valuation in this asset class,” he says.
For the company specialists, in a scenario of economic slowdown, such credit assets can also be good assets and present a better performance than shares.
Although it has very positive views about some fixed-income assets, BlackRock remains cautious with U.S. Treasury bonds (treasuries), for example, with recommendations below the market average.
In the document, the house executives stated that the yields offered by the papers should rise further as investors demand higher interest rates, given the risk they face. With the increase in uncertainties, the preference is for shorter-term papers.
In Christensen’s evaluation, the great caution with fixed income in some countries lies in the fact that rates should rise but cannot stay too high because this would cause a series of impacts – such as the increase in the cost of the government’s public debt.
Another point is linked to inflation. For the executive, the rise in prices in the current world will not be temporary. On the contrary, it will be increasingly persistent. In other words, investors will have to look for assets that offer returns beyond inflation, which should erode a good part of the yields since they will remain high. “And this will be challenging for most fixed income,” he says.
EQUITIES LOSE GROUND WITH RECESSION RISK
BlackRock is also cautious about equity investments. Although they maintain above-market average allocations to this asset class for long-term horizons (between five and ten years), they have downgraded to underweight positions in developed market equities (United States, Europe, including the United Kingdom) with a focus on the next six to 12 months.
Christensen cites that the short-term view is not as positive as the long-term view because there is significant uncertainty about the stance central banks will adopt to control inflation and how persistent the price hike will be. For him, there is a high risk of further corrections in the stock markets, as seen in the last few days.
In the manager’s evaluation, the numbers of the American employment report (payroll) released last Friday showed that the labor market remains strong and that economic activity is not yet negatively affected, reinforcing the idea that the Federal Reserve has room to leave interest rates higher.
Commenting on the outlook, specialists from the house also reinforced that the Fed should raise interest rates into a restrictive territory and that “prices have not yet fallen enough to reflect the fall in profits. In the manager’s evaluation, the chance that the country will enter a recession soon is 50%.
The outlook is also not very favorable for Europe in the short term. In the report, BlackRock’s specialists stated that the war in Ukraine could cause the continent to be affected by stagflation – a phenomenon in which, besides the generalized rise in prices, a country’s economic activity slows down and unemployment increases.
Christensen also calls attention to the fact that the continent is most at risk of recession. He points out that the European restrictions on importing Russian energy, such as natural gas, have helped raise costs in the countries and weighed on inflation rates.
In addition, he says, consumer sentiment has been negatively impacted, given European nations’ proximity to the war.
Only Japanese stocks present a neutral recommendation for investments between six and 12 months among the developed countries.
In the report, the BlackRock team notes that the country’s even “looser” monetary policy and increased dividend payments are some of the most attractive points. The manager, however, does not rule out that the global slowdown can also affect the Japanese economy.
EMERGING MARKETS AND ELECTIONS IN BRAZIL
In BlackRock’s view, stocks from emerging countries, such as Latin America, are also among those that received a neutral recommendation for applications focused on the next six to 12 months. Christensen argues the justification lies in the fact that most of these countries are further along in the interest rate hike cycle.
The director of BlackRock notes that the pandemic has accentuated a movement known as nearshoring – in which companies transfer operations to nearby locations or even within the country itself – focused on seeking greater security for production. He says it could help countries like Mexico or Brazil, which are rich in raw materials.
Christensen argues that it is now crucial that companies have the lowest production cost and that they can guarantee the production of those goods. In other words, if there is another pandemic, companies need to have other alternatives.
And if the result of the Brazilian elections is not very different from what the polls have been showing, the executive expects that there will not be great movements in the market.
“The configuration of the Congress should be most important because it will determine how much space the new government will have to make public policies,” pondered the executive.
According to him, the elections are an essential element, but the biggest concern is fiscal aspects and the growth of the Brazilian public debt.
ATTENTION TO CHINA
Besides Latin America, the company is closely following China’s economic perspectives and the comings and goings in the relaxation of part of the restrictions imposed by China against Covid-19.
Although the country has adopted measures that have reduced some risks in the short term, BlackRock’s experts reinforced that it will be necessary to increase levels of elderly vaccination and increase government support of the Chinese economy for the manager to raise again the recommendation of Chinese stocks, which today are neutral.
“We see economic growth below the 5.5% target [set by the government earlier this year]. We also believe that China’s closer relationship with Russia creates a new geopolitical concern that forces us to ask for higher compensation to hold Chinese assets,” the experts concluded in the report.
With information from InfoMoney