During the ninth edition of the Annual Forum of Local and International Specialists for the Discussion of Economic Challenges in Brazil, which was held at the Unique Hotel in Sao Paulo on the 1st of December, Western Asset, a subsidiary of Legg Mason received professionals of the investment world, with the objective of discussing the challenges Brazil faces in the short term.
Joe Sullivan, Legg Mason’s President and CEO welcomed attendees to the event. After his speech, Ken Leech, Chief Investment Officer for Western Asset, explained how the global scenario has been extremely benign for emerging markets in general, and for Brazil in particular, and what the chances are that this scenario will continue in 2018 .
Then, in a first panel, the government’s microeconomic reform agenda was analyzed as a catalyst for growth. Moderated by Paulo Clini, CIO for Western Asset Brazil, the debate was attended by Joao Manoel Pinho de Mello, Special Secretary of Microeconomic Policies of the Ministry of Finance, Walter Mendes, President of the Petros Foundation, and Marcelo Marangon, Executive Vice President of Citibank , who evaluated which are the most advanced microeconomic reforms to resume economic growth.
During the second panel, they examined how presidential elections will influence the agenda of fiscal reforms, analyzing the possibilities of achieving a fiscal balance in a turbulent political situation. On this occasion, the moderator was Adauto Lima, Chief Economist at Western Asset Brazil, and the panel counted with the contributions of Bernard Appy, Director of the Fiscal Citizenship Center, Caio Megale, Finance Secretary for the municipality of Sao Paulo, and Christopher Garman, Eurasian political consultant.
Strongly committed to Brazil.
The Brazilian economy has recently recovered from one of its worst crises in decades, and is finally returning to positive terrain. Interest rates remain at low levels, but investors worldwide have a strong interest in the yields offered by Brazilian debt.
“Interestingly, investors in Brazil think that their interest rates are at low levels due to their history, but when you think about the performance of the 10-year US Treasury bond, which is somewhat above 2%, in the German bond rate, which stands at 0.4% and the Japanese rate that is close to 0%, and you compare them with the interest rates in Brazil and the possibility that the currency will appreciate as the economy improves , you can get a very attractive return,” said Ken Leech during the press conference with journalists.
Meanwhile, Joe Sullivan added that they had increased exposure to Brazilian debt in all those portfolios in which the portfolio’s mandate allows it: “We have positions in Brazilian sovereign local debt and in certain Brazilian corporate bonds, usually denominated in dollars.”
Although the situation has improved in the Latin American giant, it’s still of vital importance that there is a fiscal reform in Brazil. “Our expectation is that some kind of fiscal reform will be approved, if not this year, the next, but we believe it will be enough to maintain support in favor of Brazilian debt securities. The Brazilian policy has turned towards a government more favorable to the markets, although the elections always introduce an element of uncertainty. We hope that this type of policy will continue, but we are prepared for what may come.”
Regarding how the normalizing process by central banks may affect emerging markets, Leech said that they hope that this time it will not be a problem: “If you think about the last three years, from 2013 to 2016, when the central banks were decreasing their interest rates, unlike in other periods, the rates in emerging markets rose, with a divergence of direction between the rates of developed countries and that of emerging countries. Our vision is that if the central banks begin to raise interest rates it will be because growth has improved and if this is true, then interest rates in emerging markets would not go down. With inflation so low, our vision is that interest rates are going to rise very slowly, so there should be no great impediment for emerging markets.”
The local investor’s appetite for diversification increases
Brazilian investors first became interested in international equities with exposure to currency. Many investors did not hedge currency because they really needed high volatility to compensate for the high rates that Brazil had until just a few years ago. In the last year, there has been an enormous success in hedged strategies because investors no longer need to have exposure to currency risk to find international investment alternatives that provide competitive returns when compared to the local interest rate level.
In any case, the demand from institutional and retail clients is different. The institutional client seeks long-term returns and is interested in variable income products that invest in infrastructure and global fixed income products, because they are a very powerful diversifying element as compared to local debt.
“Brazilian investors have the great advantage of having one of the highest interest rates in the world. So it’s not easy to find Brazilian investors wanting to invest outside of Brazil, where interest rates are much lower. But for the first time, Brazilian interest rates are at their minimum in decades, with inflation close to 3%. Many of their assets are invested in Brazil, but we have seen a growing interest in buying global returns. We believe there will be a greater movement towards global diversification on the part of Brazilian investors,” concluded Joe Sullivan.