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Impact of Lula on Brazil's Stock Market and Bonds
Is Lula Unstoppable?
Markets are calm. Investors are happy. Who would have thought it was possible. To comeback and win the Presidency of Brazil with a margin of barely 2%.
Despite winning only one out of five regions, with an overall margin of 2%, Luiz Inácio Lula da Silva will become the President of brazil on January 1, 2023. And Interestingly, the first ever to serve three terms (albeit not consecutively).
Replacing the right win Bolsonaro may result in protests and social unrest that could paralyse the country. And reports have today already started emerge. But markets are calm. And investment managers are generally positive on Brazil Equity and Brazil's hard currency and local debt.
Brazil currently has lots of positives. From a governmental and administration perspective, past corruption has resulted in stronger governance. The central bank is independent. Any extreme leftist fiscal policies can be countered by the now right-leaning congress. In fact, inflation is coming down, and the likelihood of rate cuts are more likely in Brazil than in the U.S., Europe, or Asia.
Many initiatives has also been launched on the investment side of the economy. Private Sector Banks are taking more share of the loan book. The all important Petrobras is behaving more like the global listed Oil sector industry - paying large dividends and de-leveraging. And vital infrastructure is receiving the attention is has long needed.
Global Macro
We see danger ahead. Markets are still too high, and protection is expensive in an increasingly nervous world; common sense suggests one should invest conservatively, and in safe assets. In a world where people find themselves without the ability to pay commitments as they arise, forced selling drives prices. Among risky assets like equities, one of the counter-intuitive things in a liquidity crisis is that securities perceived as safest and most liquid go down sharply, because investors are forced to sell what they can, not what they want to. We therefore regard plentiful liquidity in the portfolio as overwhelmingly attractive; it allows us to make the most of the opportunities that arise in the aftermath of a crisis. But first we have to get through the storm.
The thought that central bankers can do much to change the broad sweep of inflation is, in my view, far-fetched. Lowering interest rates and keeping them down ensured that, in the aftermath of the 2008 crash, the world escaped a dislocative deflationary recession, and experienced instead a reprieve from deflation. Their actions, however, had an inevitable consequence: the onset of a virulent inflation. This was perfectly predictable at the time, and, indeed, we predicted it.
There was, however, no money to be made from the insight that money had lost stability post-2008 – the car would swerve maybe towards deflation, maybe towards inflation, but the final result would certainly be inflationary, because the authorities’ obsession was (and is) to avoid deflation. The game changer was to be rightly prepared for inflation, and for the last ten years, we have been. To call it too early is, in our book, to call it on time.
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