Credit Suisse raises Brazil to “overweight” and highlights the Real’s appreciation as key

RIO DE JANEIRO, BRAZIL – With the increased flow of foreign capital to emerging nations in recent months, Credit Suisse raised its exposure to this block of countries, focusing on China and Mexico and raising Brazil to overweight (or above-average exposure) within its global strategy.

On the other hand, the bank decreased exposure to countries in Europe although it remains overweight. Strategists continue to be overweight in the UK and Japan while underweight in US equities.

“The key to Brazil’s above-average performance is the Real. 80% of the time when the currency appreciates, Brazil outperforms,” wrote Andrew Garthwaite, chief global strategist at Credit Suisse. Since November last year, Credit’s calculations show that the Real has outperformed the DXY index by 9.4%. In February, the dollar even went slightly below R$5, even though it recorded bullish sessions amid the unfolding crisis between Russia and Ukraine.

Garthwaite says that Brazil usually enters a virtuous cycle when the Real appreciates because the currency plays a vital role in cooling inflation and interest rates. “Lower interest rates supported by a stronger real improve the country’s fiscal position,” the report highlights.

For the bank, this is fundamental in a context in which Brazil’s net debt has become the highest among emerging countries, reaching 91% of GDP in 2021.

Credit Suisse believes that Brazil’s current transactions tend to improve with an increase in commodity prices, which would benefit Brazilian exports. “Brazil is also seeing an acceleration in pre-salt oil production, which should have a lower carbon footprint compared to most global production,” the report says.

The bank’s economists predict a 0.5% drop in Brazil’s GDP by 2022 and point out that the industry PMI indexes are at the bottom of their range and quite depressed relative to global indexes.

On the political front, Credit says that a potential government of former president Lula da Silva should not alter a greater commitment to fiscal responsibility.

“Lula [da Silva] recently said that Geraldo Alckmin, former governor of São Paulo and seen as a centrist, is a potential vice-president. It could signal that the Lula government tends to maintain fiscal responsibility. Our economist in Brazil, Solange Srour, believes that Lula would have a pragmatic posture toward fiscal reform,” says the Garthwaite report.

Credit Suisse also states that the equity market in Brazil is “very cheap”.

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