‘Global investor focus left Brazil for Asia,’ says Goldman Sachs

Opinion is from Caesar Maasry, head of emerging markets and global investments at Goldman Sachs.

Brazilian assets may even achieve a positive performance in 2023, but the focus of investors from emerging markets has migrated to Asia, more specifically China and South Korea, says Caesar Maasry, head of the area of emerging markets and global investments at Goldman Sachs, in an interview to Valor. 

In addition to the performance superior to that of most peers in 2022, which makes the starting point for the local market unprecedented this year, the executive poses domestic issues – fiscal and macroeconomic – as possible impediments to a better positioning at the end of 12 months.

“We have never, in the last two decades, seen a year where the S&P 500 is down 20% and the Ibovespa is up, and that was in 2022. So, Brazilian assets start from a high base. It was the fundamentals during the rise in commodities and the Central Bank’s action to carry out the tightening cycle quickly that boosted foreign participation and assets during the year, as well as some enthusiasm around the election on the part of international investors. But I believe that has passed,” he says.

The executive says that it is still not clear what the economic effect will be, and consequently on the results of the companies, of the governmental transition, but he recalls that there has already been an increase in the risk premiums of domestic assets, which is difficult to fix. 

In his view, since it is not plausible to price new reforms, the best possibility is that there is no more fiscal expansion and no alteration of existing reforms. Only in this way, he points out, can asset prices once again attract attention.

“We want to be clear about the political headlines, if they are going to settle down. Despite not having a strong opinion on the subject, whenever a representative appears to have a lot of authority and few counterbalances in a government, it is a warning sign for investors”, he says. “Of course, if there is no movement in this direction, the assets look attractive, but I don’t think there should be a change in the narrative in the short term. We are focused on reopening China. It’s a more plausible story for the first half of 2023 in terms of fundamentals and valuations.”

Despite being known for leveraging the growth of trading partners, he argues that the expected movement for 2023 in China is different. 

Goldman Sachs believes that the push will be more concentrated in sectors such as tourism and domestic services, much less related to the credit boost that provides high demand for commodities and helps to support, in part, Latin American markets.

Maasry also mentions that, at the beginning of 2023, among the funds with a mandate to invest in emerging markets and with the group’s MSCI as a “benchmark”, 68% had exposure above the consensus in Brazil and only 29% were “overweight” (above the average) in China. 

Another sign that the starting point for the year is different and that, in his opinion, there may be some competition for capital between regions.

“But given the bear market we’ve been through, the most important thing that will happen with flows is that when we have stability in fundamentals, we’ll see money coming back into the emerging asset class as a whole, and that really benefits all geographies,” he says.

He adds that the global economy is still in a weak state, with low growth and unacceptably high inflation, which will continue to impact markets. 

In the middle of the second quarter, however, he understands that prices will have calmed down in the US and the Fed will at least be able to pause its tightening cycle, giving the markets a starting point.

Without China sustaining a strong appreciation of commodities and with less priority than some developed markets that suffered more in 2022, the executive hopes that, to reach the 116,000 points projected by Goldman Sachs at the end of 2023, the Ibovespa will take advantage of the recovery of some stocks linked to the domestic economy, even with a probable downward revision of earnings throughout the year. 

By sector, it bets on consumption and banks after the most recent correction, as they are “discounted beyond the fundamentals”.

If the thesis for the American economy is confirmed, and after a challenging short term, Maasry sees a possible devaluation of the dollar to the “fair price” of R$5. 

But he sees this as a weakness of the dollar, and not as a sign of real strength. Looking at some Asian currencies, like the South Korean won, he says, he expects further appreciation against the US currency. 

He says that the real has a strong “carry trade”, which supports prices and decreases i the drop space. On the other hand, as he thinks that the terms of trade should not improve, he also does not see a big “upside”.

“When we look at interest rates in Brazil compared to other emerging countries, it is one of the few where real rates are above average compared to the US and there is still some fat. This is also true for other parts of Latin America, but less for emerging European and Asian countries. From a fair value perspective, it still looks attractive. And real interest rates in Brazil look more attractive than the stock market. However, given the fiscally concerned environment, we would not advocate tactical trades right now.”

With information from Valor Econômico