Investors bank on Brazilian recovery

Investors bank on Brazilian recovery

Capital Markets Economy & Policy Brazil

Short term uncertainties linked to the October elections and the external environment have not dampened investors’ enthusiasm for the Brazilian economy and its capital markets.

“The recovery has been quite a genuine one,” said Marcelo Arnosti, chief economist of BB DTVM, even though it may only reach 2% or 2.5% this year.

The driving factors are market confidence, the decline in real interest rates, healthy corporate balance sheets, and improving financial conditions of households. “The question is how quick the process will take place,” he said at LatinFinance’s 16th Brazil Finance and Investment Summit in Sao Paulo on Thursday.

“So far, credit activity has been slower to pick up than expected. But if a candidate who is acceptable to the market is elected, it will really be a year of recovery,” he said. More importantly, the outlook for 2019 looks stronger.

Market conditions have already improved significantly, said Philip Searson, head of international DCM at Bradesco BBI, as the CDS fell sharply from 550 points in 2016 to 350 points last year and to between 170 and 180 points at present. Meanwhile, Brazil’s share of issues on Latin American capital markets has increased from 10% in 2015 to 25% last year.

“Single digit interest rate has changed investment perspectives. We need more technology. We need to have new products that are less dependent on public debt. Private debt will come to the local market and will become more relevant,” said Paulo Werneck, CIO of Funcef.

Most investors still believe in a form of decoupling between political turmoil and the economy, due to ongoing deep structural changes.

“We are going through a radical transformation. We are only a third of the way through. It may take four years until we get there,” said Ingo Plöger, president of the Business council of Latin America (CEAL).“The Brazilian society is really divided. But the transformation is here to stay and it cannot stop… Any candidate who does not embrace reforms runs the risk of losing (the election),” he said.