Brazil: risk aversion increases, and fixed income is highlighted again

Fixed income shone in February, while the investor who got excited with the low prices on the stock market saw their strategy frustrated by a season of selling stocks.

Without new money from foreign capital – the fuel that drove equities throughout 2022 and in January – assets considered more conservative and tied to interest rates proved to be a better destination.

In the month’s ranking, the leadership went to inflation-linked government bonds with maturities of up to five years, reflected in Anbima’s IMA-B 5, appreciating 1.41%, with gains of 2.82% in the year.

The effortless CDI accumulates 2.05%.

The Ibovespa, on the other hand, retreated 7.49% in February, with the 2023 account negative 4.38%.

The “small caps” index had the worst performance, losing 10.5% in the month.

With the perception that the Selic rate will be stuck at 13.75% a year for longer, fighting the triad of liquidity, return, and security of fixed income has become difficult.

“I usually joke with the Americans at Principal [which owns 100% of Principal Claritas] that our biggest competitor is the CDI,” says Ernesto Leme, commercial director of the asset in Brazil.

“As most of the managers are factories of high value-added products, the sector directly perceives the lower appetite for risk in the uptake. The investor should continue to embrace fixed income.”

Within its risk ruler, Principal Claritas strongly recommends buying National Treasury Notes series B (NTN-B), which has assured fat rates in addition to IPCA correction.

Depending on the term, they have 4% to 6% premiums.

“If you look at the Selic at 13.75% and an expectation of IPCA at 6%, it’s the highest real interest rate in the world; the papers are very attractive,” says Leme.

“Regarding the pre [prefixed bond], I don’t have the courage [to suggest], what’s left I allocate in LFT [or Treasury Selic] because 13.75% is not something to throw away.

In credit, the manager lowered its indication by one degree, to a moderate allocation, still above the market average.

Leme says he is more reticent after the event of Americanas, which went into judicial reorganization in January.

In the class, the preference is for a diversified global portfolio, which has more options, liquidity, and a more efficient update to market prices (and more volatile) than in Brazil, with a more restricted secondary market.

Although from a foreigner’s point of view, the Brazilian stock market is at one of the most discounted levels in history, Leme says that the uncertainties in the macroeconomic field have put the brakes on international capital.

“There is a fight between a very attractive valuation and the dynamics of economic policy,” he says, referring to government pressure for lower interest rates as a noise added to the monetary roadmap of the Central Bank (BC) to lower rates when inflation cools down.

“That has generated a lot of noise, and perhaps in a way that is not appropriate. If it lessens the tension, I believe there is room for the market to move.”

Foreign investors sold R$1.12 billion in shares in February, but the balance for the year remains positive at R$11.4 billion.

The company maintains a “neutral” recommendation for the stock market, while in multimarket funds, the recommendation is to buy strongly, based on the evaluation that this is the class in which managers can better navigate the volatility in the various fund profiles.

Amid the debate about changes in the inflation target, Itaú Unibanco decreased its positions in real interest rates since November and in fixed-rate bonds at the beginning of February, reading that the Central Bank may take a little longer to reduce the Selic rate, says Nicholas McCarthy, chief investment officer of the institution.

“We believe the trajectory is downward, but not until the first quarter of 2024 or the last quarter of 2023. Inflation rates still show resistance to falling.”

The Executive cites that the exoneration of fuel taxes will hold price indexes at a higher level for another two or three months.

This environment also makes the Brazilian stock market unattractive, which tends to gain pace only when future interest rates drop.

“Until then, it will be a more lateral movement,” says McCarthy.

“Some specific papers, like commodities, can move because of China’s [reopening], but there’s always a competitor that calls CDI, which in the short term is the best alternative or papers indexed to CDI or IPCA,” he says.

According to the Executive, the event with Americanas had the side effect of adjusting the premium of the credit assets to an adequate level.

The investor had been buying this type of risk with little spread as if it were a CDI without tax.

In a moderate risk profile portfolio, Itaú currently indicates only the structural allocation of 14% in the stock market, a small portion, but one that hurts because of the high opportunity cost.

McCarthy attributes the recent pause of foreign investors in the stock market to the international scene, more because of the inflationary surprise in the United States than the perception that the monetary tightening policy abroad will go much further.

The ceiling for American interest rates was at 5%; now, it is at 5.5%, he cites.

“Looking ahead, we foresee that American interest rates are close to the top and that in Brazil, we just need a more consistent fall in inflation to [the Selic] fall as well. It will be a favorable period for the Brazilian and world stock markets.”

McCarthy calls attention to the thesis of the weakening of the dollar, a phenomenon that, when it occurs, lasts a few years, and this is an interval in which the best assets are usually stock markets of emerging countries, the European and the American, with gains of 25%, 16%, and 12%, on average in dollar, respectively.

“The foreigner, no doubt, has been important. They bought something close to R$100 billion in 2022 [at B3], and the big seller was the Brazilian, who left the stock exchange and basically invested in the CDI.”

In February, up to the 24th, foreign capital sold R$1.12 billion in B3’s secondary market, but in the year to date, it has accumulated inflows of R$11.4 billion.

Individuals are starting to return to the stock market, and this month bought R$2.39 billion, with the 2023 balance positive by R$601.5 million.

In the international portion of the portfolio, McCarthy says he had already reduced positions in fixed income and shares.

Still, with most of the monetary correction of the Federal Reserve (Fed, the US central bank) already done, he started to add debt securities in general, both higher risk securities (“high yield”) and US Treasury and emerging countries issuers.

In developed markets, the institution remains cautious, with an allocation below neutral.

The Executive says, however, that he is encouraged by the economic opening of China after 2022, in which the “zero covid” policy restricted the movement of the population.

Investors had to quickly adjust their perception of risk when 2023 began because the government changed, and so did the discourse, says Wilson Barcellos, CEO of Azimut Wealth Management in Brazil.

“A more conciliatory pro-capitalism tone was expected from the president [Luiz Inácio Lula da Silva], and it came a little different from the Lula of the first term, more like [former president] Dilma [Rousseff],” he says.

“The apprehension brought things that the market didn’t rate in its macro risk expectations, and that’s reflected in all asset prices, structurally.”

The Executive cites the crusade led by the Executive against the monetary policy of Roberto Campos Neto‘s BC.

Without a known fiscal plan to provide conditions for lowering the Selic, it backfired.

If before, analysts expected an indication or even an interest rate cut before the second semester; this agenda has been postponed.

“In a recent event, Campos Neto was very clear; he is not the one who defines the interest rate, he defines the Selic [short term], the interest rates are the market agents, the long curve steepens not because the Central Bank wanted it to, but it is a sign from the economic agents that the risk has increased and they demand a higher premium.”

In this scenario, Barcellos says the best risk/return ratio today is in government bonds tied to the Selic.

He reminds us, however, that there is also a price for staying out of higher value-added assets if the situation calms down, losing an opportunity to have reasonable portfolio appreciation.

“The bottom line is that the risk is high regardless of allocation,” he says.

“But it is best to be more conservative, seeking lower volatility because the premium given is very favorable, at almost 14%. The CDI is a good umbrella.”

With information from Valor Econômico