Top Brazil Investors Call for End to Interest Rate Cuts

RIO DE JANEIRO, BRAZIL – Rogerio Xavier and Luis Stuhlberger, who manage a combined US$21 billion (R$84 billion) at two of Brazil’s biggest hedge funds, say the Central Bank has done enough to stimulate Latin America’s largest economy.

The boost from another interest rate cut isn’t enough to make up for the potential risks, according to Xavier, a founding partner at SPX Capital. Markets are paying little attention to the fact that inflation targets are set for lower levels in the upcoming years, and would be leading policymakers to commit a “big mistake” by lowering the Selic benchmark rate further, he said.

“Today’s monetary policy will have an impact next year,” he said at an event hosted by Credit Suisse in São Paulo. Lowering the Selic to about 4 percent, from the current 4.5 percent, will leave inflation-adjusted borrowing costs close to zero, he said. “That seems aggressive. If we make monetary policy too loose, we’ll have to tighten it soon.”

The comments were echoed by Stuhlberger, the founder of Verde Asset Management, who said policymakers shouldn’t go ahead with a rate cut he expects next week.

“I think the central bank should have stopped at 4.75 percent,” he said. “The negative side, of cutting and then having to hike, is not what the market is expecting. The market is practically forcing the central bank to cut further.”

Traders are pricing in a cut of another 25 basis points to the key Selic rate, which would take it to a fresh record low of 4.25 percent. The central bank is scheduled to announce its next decision on February 5th after market close.

With about R$42.5 billion under management, SPX ranks among Brazil’s biggest independent hedge funds. Verde has about R$45.6 billion under management and a flagship fund that has posted a total return of more than 17,000 percent since its inception two decades ago.

The fund managers have similar calls for the currency, one of the worst in the world this year. Stuhlberger said he isn’t long or short the Brazilian real but doesn’t see much room for it to gain against the dollar. Xavier said the currency will likely fall further against the U.S. dollar.

Stuhlberger said Verde still has a long position in Brazilian stocks, but added that he’s already looking for an exit door amid what he sees as a potential bubble as investors rush to equities in search for returns they were used to getting in fixed-income investments.

“You usually see a bubble form when a lot of people pile in,” he said. “Every two or three weeks there’s a new fund — private credit, private equity, etc. It’s really good for the Brazilian economy, but it could be bad for investors in these markets.”

Source: Bloomberg