By Jessica Bahia Melo
Investing.com – With the fourth consecutive rise in the basic interest rate of the Brazilian economy and expectations that it will continue to rise, Luis Garcia, CIO at Sul América (SA:) points out credit funds as recommended assets at this time. Garcia participated this Monday in the stage “Selic engages a new high cycle, but what changes this time?” of Expert XP, online event held by Xp Inc (NASDAQ:). According to him, the exchange will undergo yet another “maturity test for Brazilian investors”.
“When real interest returns to 4%, there will be another maturity test. Brazil was the Disneyland of rentiers. This will be a litmus test to see if investors will continue to have a stock market in their portfolio”, he believes.
Sloped interest curve
The CIO asserts that the long-term inflation expectation is not unanchored and current risk premiums are not justified by a higher expectation in the future. According to Garcia, the combination of fiscal risk and electoral risk are the main factors that interfere at this time. “When we look at the stock market, , commodities and interest; long interest rates are the most affected by fiscal risk”, he reinforces.
According to Garcia, since the beginning of the crisis caused by covid-19 last year, there has been an excess of stimulus in a way never seen before. The combination of expansionary fiscal and monetary policy would at some point cause inflation, but the expectation was that it would be transitory. For the CIO, the greater the credibility of the Brazilian monetary authority, boosted by the independence of the BC, the greater the perception that the movement will be different from what happened in 2016.
“We, despite reaching the same real interest rate projected in 2016, this time it is perceived as an adjustment, very different from a situation of lack of control”. Garcia ponders that the Brazilian debt is around 85% of GDP currently, against 65% of GDP at that time. But, even with higher indebtedness, he believes that the credibility of the BC’s economic team is much greater and, therefore, the market sees the risk of a lack of control as lower.
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