Fast reading
- Benchmark Bovespa index has fallen 7% YTD, while Brazil’s 10-year government bond yield has risen 18% since the start of the year.
- Brazil has a history of running budget deficits, which have had negative knock-on effects on growth and inflation. Brazil’s public debt as a percentage of GDP rose to 76% in April.
Brazilian markets have endured a sell-off this year as investors fret over the spending plans of President Luiz Inácio Lula da Silva’s government.
The country’s benchmark Bovespa index has fallen 7% YTD, while Brazil’s 10-year government bond yield has risen 18% since the start of the year1. Meanwhile, the Brazilian real has slipped about 12% against the US dollar this year making it the third-worst performing emerging market currency after the Turkish lira and the Argentine peso2.
President Lula returned to power in January last year on pledges to boost welfare spending and expand the state. His time in office has seen the rapid expansion of various mandatory expenditures and combined with his government’s reluctance to cut spending in other areas, fears have been growing that it may fail to eliminate the primary deficit this year as planned.
Brazil has a history of running budget deficits, which have had negative knock-on effects on growth and inflation. The country’s public debt as a percentage of Gross Domestic Product (GDP) rose to 76% in April3.
President Lula is pushing for more spending, but legislation will likely limit his generosity.
Despite the sell-off in the Brazilian real, Jason DeVito, Lead Portfolio Manager for Emerging Market Debt at Federated Hermes, says some Brazilian assets have remained surprisingly resilient. “Corporates in Brazil are providing a huge opportunity given the resilience of the economy and healthy export markets,” he says.
“President Lula is pushing for more spending, but legislation will likely limit his generosity. I imagine he will also be met with heavy pushback from the business community based on concerns around the investment climate as debt rises,” he adds. As a result, DeVito remains optimistic on Brazil and expects President Lula will be flexible and pragmatic in the face of numerous challenges.
On Thursday, Brazil’s central bank raised its GDP growth forecast for 2024 to 2.3% – up 1.9% predicted in March – on the back of stronger-than-expected economic activity, which has also pushed up inflation projections for this year to 4% against an official target of 3%4.
Figure 1: Bovespa down and government bond yields up
US election heats up
In the US, the first televised debate between President Joe Biden and his Republican challenger Donald Trump took place on Thursday in Atlanta on what is expected to be a close and fractious election campaign. “Markets will be paying close attention to see if the presidential debate among these two well-established candidates provides the impetus for a shift in the probability of either winning in what appears to be a coin-toss election,” says R.J. Gallo, Senior Portfolio Manager for Fixed Income at Federated Hermes.
“President Biden and former president Trump differ materially on a wide range of issues, including regulatory policy, tax policy, immigration and international relations. That said, they share a sceptical and adversarial view towards free trade, although former President Trump seems biased to employ tariffs even more aggressively should he retake the White House,” Gallo says.
“The policy differences between the two candidates likely means the choice of the US electorate will precipitate different directions from the executive branch on a range of key issue areas, including: health, environmental and anti-trust policies; income-tax rates; immigration and its effect on wages and inflation; US policy in the conflict with Ukraine; and the effect on inflation and the labour market from changing trade restrictions. Of course, if American voters produce a divided government with the Senate and/or House of Representatives held by the opposite party than the White House, big policy changes would seem much less likely.”
For further insights on global equities, please see our Impact Opportunities Equity, Q2 2024 report.
