SOME QUICK THOUGHTS ON BRAZIL

Takeaway: While we continue to generally shun EM exposure, patience is poised to provide investors with a good opportunity on the long side in Brazil.

Down -2.5%, the Bovespa Index was hammered yesterday (closed today) on a +50bps rate hike that generally surprised the bulk of consensus expectations of a +25bps hike (per 38 of 57 economists polled by Bloomberg). After the cut, the 1Y OIS market is now pricing in just one more +25bps hike over the NTM, which may come as soon as the JUL 10 meeting.

 

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This subdued outlook for incremental tightening is in line with our expectations given our views on global inflation dynamics (HERE and HERE) and that the hawkish trend in the leading IGP-M CPI already inflected in MAR with the benchmark IPCA CPI following suit in APR.

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As we mentioned a few months ago, BCB was behind the curve with respect to inflation expectations, but their recent hawkishness has their credibility back on track. Moreover, Brazil’s 2H13 GIP outlook looks as robust as any country across Asia or Latin America.

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As we’ve said all along, due to poor policy implementation and commodity deflation, patient international investors were going to get a chance to invest in Brazil on sale. In that vein, the next rate hike is likely to be the final catalyst for getting long the consumption side of the Brazilian economy (BRAQ).

All that being said, we don’t think the coast is clear just yet. Specifically, Finance Minister Guido Mantega’s most recent negative jawboning of the BRL (down -4.9% MoM) is still cause for alarm, given that Big Government Intervention in the FX market and in the Brazilian capital account has been one of the primary factors for the demonstrable underperformance of Brazilian equities and the BRL on a TTM basis.

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All told, while we continue to generally shun emerging market exposure, a little more patience is poised to provide investors with a good opportunity on the long side in Brazil – particularly those investors that must remain allocated to the EM space.

Darius Dale

Senior Analyst