By Paula Arend Laier
SAO PAULO (Reuters) – An outcome of the presidential election in Brazil in which respect for fiscal responsibility is rewarded, whichever the winner is, has the capacity to animate the Brazilian market, assesses the chief executive of Truxt Investimentos.
“The current fiscal framework is not sustainable,” said José Tovar in an interview with Reuters, noting, however, that an answer on the plans for public accounts should not be known before the results of the polls.
The CEO of Truxt, which has 17 billion reais in assets under management, sees the election with two populists running, promising a lot in the short term, “and the account doesn’t close”. Even if campaign promises cannot be taken literally, he says, the fiscal signaling of the main candidates is worrying, even though both are known and already have experience in power.
“We have a very populist fiscal scenario, both for the incumbent and the challenger. I find that dangerous.”
For the executive, the big question is related to the plans of former president Luiz Inácio Lula da Silva (PT), who today leads the polls of voting intentions, whether he will adopt a more pragmatic or more populist economic policy.
“Which Lula comes if he wins? A Lula more to the left or more pragmatic as in his first term?”, he asked.
The PT has said that he is against the spending cap, but has also shown his deputy on the ticket, the former governor and his former political opponent Geraldo Alckmin (PSB), as a guarantor that his eventual future government will have political and fiscal moderation.
Tovar considers President Jair Bolsonaro, who is second in the polls, “more predictable” in terms of economic policy, despite the current government spending big fiscally to seek re-election next month.
“The market sees more privatizations and a smaller state with Bolsonaro”, he observed, also noting that he expects a reform agenda, such as the administrative one, and that the Minister of Economy, Paulo Guedes, will try to hold the fiscal after the election.
But whichever candidate wins, he reckons the sooner a fiscal signal comes, the better.
He expects a close race, with a second round, citing that it is an election between two charismatic leaders, who can speak to the public.
MORE OR LESS CLEAN
Despite the uncertainties related to the election and the fiscal risk starting next year, Tovar believes that Brazil is not so bad in the picture, which explains the “ralizinho” of the stock market in the country.
“At the moment, given the problems in China, in Europe, the high inflation in the United States, we are more or less tidy”, he said. In the year, the Ibovespa accumulates a high of around 6%.
He details that the measures that increased public spending helped economic growth, but without affecting the country’s debt/GDP ratio, because there was a significant increase in revenue, largely supported by the good performance of commodities – “and Brazil is commodities” .
At the same time, he adds, the drop in fuel prices eased inflation, while the Central Bank in Brazil did its monetary policy homework.
“I am excited about Brazil if we have a reasonable fiscal (framework) and the world behaves properly, without a big rise in US interest rates, without major geopolitical problems,” he said.
He agrees that the country’s real interest rates are quite high, but says he is still excited about the Brazilian stock market.
According to Tovar, Truxt’s portfolio includes shares such as Eneva, Equatorial Energia, PRIO, Eletrobras, XP, BTG Pactual, Itáu Unibanco and Localiza.
They also have a position in Petrobras, although they have been reduced after the strong appreciation of the shares and expressive dividends. In addition, added the executive, in the final stretch of the election, “it becomes more risky”.
EDF
Any animation in the Brazilian market, however, depends on abroad, especially the monetary policy of the United States, but also geopolitical events such as the Russia-Ukraine war and its consequences in Europe, in addition to the problems in China.
The main question related to the US, according to the executive, is when the US central bank will end the cycle of high interest rates, because if the Federal Reserve starts to rise too much, it will hurt the whole world.
In the very short term, he explains, the focus is on the meeting on the 20th and 21st of this month, whether the Fed will decide on an increase of 0.50 point or 0.75 percentage point; and in this context, the August consumer inflation data that will be released next week.
“This seems like the most important thing in the world, but it’s only for the very short term, because what you have to understand is what time the North American Central Bank will stop… and, according to American interest rates, we will see the consequences on the growth of the rest of the world.”
Tovar has a scenario in which the Fed ends 2022 with the range cap at 3.5% or 3.75%, so it would stall the rally to assess the scenario. The Fed’s current target range for the benchmark interest rate is 2.25% to 2.50%.
In China, he highlights that there is a big problem in the real estate market, as well as a trap with restrictions related to Covid control policies, which delay the Chinese recovery.
“China will grow less and there is less of a little engine for the world to grow,” he said.
Europe, he notes, is suffering from the energy crisis in the wake of the war between Russia and Ukraine, which has raised inflation in countries on the continent and also pressured fiscal performance due to measures to hold down energy prices.
“Europe is suffering and will continue to suffer”, he evaluates, drawing attention to the absence of signs of an end to the conflict, or even a clearer movement in some direction.
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