Brazil – Financial Conditions

Here are 3 interesting charts on Brazilian Financial Conditions which have improved markedly in the past few months.

// BRL local rates Jan27 = -300bp from highs, below moving averages, and still very steep despite no more easing from BCB.
// 2045 Linkers at the bottom of the historical distribution, below moving averages.
// Curve still extremely steep

1/ Lower long-term financing costs for the private sector.
2/ With effective policy rate at the lows, @ 6.40%, and inflation expectations on BCB’s target until 2020, savers will be itching to find better alternatives to deploy capital.
3/ Lower Government financing costs = improved fiscal position over the coming years.
4/ Lots of room for flattening.
4/ Devalued BRL to help external accounts.

Now a few more takes:
a/ Anecdotal evidence tells me that entrepreneurship bringing in new business models is expanding in Brazil and will add to productivity + competition, helping keep inflation in check for longer. Fintechs, SaaS companies, VC money pouring in (General Atlantic, Qualcomm Ventures, Sequoia, Redpoint, Accel Partners, among others).
b/ High unemployment will keep labor costs low for a lot longer too, inflation subdued, profits high.
c/ Local pension funds, who in the past had ~32% of their capital in equities, now have < 18%. d/ Still a lot of pessimism due to inertia, the country's bad fiscal shape and unknown incoming government (PSL's party possibly the biggest party in congress with >10% of seats).
e/ And the death of the Left, rise of the Right, possibly a liberal one.
f/ Appointed ministers, secretaries and state companies’ leadership so far have been above average, delivering on promises.

Great long-term investment case for Brazil. Downside risks in my view rest on RoW imploding, especially China, despite Brazil being a very closed economy and/or the Right not really delivering on promises like Pension Reform and reduced role of State in the economy.

Equities + Long-term Linkers = great risk/reward.

USDBRL, though, the least attractive for now as real carry is in the bottom 5%-ile of last 2 decades, but if Eq + Linkers perform = flows will come.

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