Investor-Darling Brazil Faces Key Test as Lula Optimism Dims
Comment of the Day

November 16 2022

Commentary by Eoin Treacy

Investor-Darling Brazil Faces Key Test as Lula Optimism Dims

This article from Bloomberg may be of interest to subscribers. Here is a section:

Lula said that he won’t give any details on his cabinet before returning from an international trip to attend COP27 in Egypt.

“The stakes are high in terms of fiscal uncertainty, in terms of cabinet composition, in terms of key appointments in the economic team,” said Joel Virgen Rojano, director for Latin America strategy at TD Securities. “All of that for now has a really big question mark and the markets are becoming impatient.” 

Emerging-market investors from Neuberger Berman LLC to Franklin Templeton had bet on the South American nation ahead of the election as they saw little distinction between Lula and President Jair Bolsonaro’s fiscal agenda. Neuberger wasn’t immediately available to comment on its current recommendations in Brazil.

“Markets tend to hate uncertainty,” Dina Ting, head of global index portfolio management for Franklin Templeton exchange-traded funds, wrote in an emailed response to questions. “From a long-term perspective, the fundamentals and macro factors have not changed. Brazil is still trading at a discount to historical averages and helped by both elevated commodity prices and favorable demographics, including its young workforce.”

Eoin Treacy's view

Brazil faces many of the same issues as everywhere else. There is a clear need to enact some type of fiscal control but the population are already impatient with the pace of economic recovery. Those are two opposing perspectives and the new administration will need to tread very carefully if the currency is to remain stable.

The Brazilian Real is testing the succession of higher reaction lows which have been forming since 2020. If the corruption the Rousseff administration was notorious for is reenacted in this government, investors will quickly act to dispense with supporting Brazilian assets.

The iBovespa Index has been ranging mostly below the 2020 peak for two years and is currently easing back from the most recent retest of that area. The 100,000 level is a key psychological level for the Index and will need to hold if the benefit of the doubt is to be given to potential for medium-term upside.

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