Brazil’s bond market is rebounding, with investors returning to dollar bonds of firms like Raizen and Usiminas after a selloff linked to fiscal concerns. This year, dollar bonds have achieved a 2.2% return. Favorable market dynamics, including the real’s rise and renewed corporate debt issuance, contrast sharply with the previous year’s downturn. Nevertheless, investors are wary of high interest rates and fiscal volatility.
Money managers are cautiously reinvesting in Brazilian assets, particularly in dollar bonds from companies like Raizen and Usiminas, after a selloff attributed to concerns regarding the government’s spending plans. Since the start of the year, dollar bonds of Brazilian firms have yielded a 2.2% return, outperforming the average returns of corporate bonds in emerging markets. Recently, Brazilian financial assets have benefited from a shift in focus from global political dynamics, specifically as U.S. President Donald Trump redirects his attention towards other developing nations.
The Brazilian real has appreciated nearly 8% in 2023, marking it as the strongest major currency worldwide, contributing to a 13% upsurge in local equities when measured in dollar terms. Several Brazilian companies, including Embraer and JBS, have also entered the debt market this year, reflecting renewed investor interest. This recovery contrasts starkly with the situation in late 2024, where looming uncertainties over fiscal policy led to significant declines across various financial sectors.
According to Sergey Dergachev from Union Investment, a more favorable outlook for Brazilian bonds exists now that Brazil is less under scrutiny from Trump’s policies. However, the risk remains concerning due to high-interest rates impacting borrowers. Investors are evaluating firms known for financial resilience and strong management, exemplified by Raizen and Usinas Siderúrgicas de Minas Gerais.
Brazil’s benchmark interest rate is projected to reach 15%, the highest in 20 years, due to inflation pressures stemming from rising food and service costs. Mauro Favini from Vanguard emphasizes that opportunities in Brazilian corporates exist, yet investors must be aware of the implications of elevated domestic rates and the potential economic slowdown they could induce.
Normally, foreign investors tend to invest in dollar-denominated bonds due to risks related to Brazil’s domestic debt environment, which is largely populated by local entities and hindered by complex legal and tax systems. Dimitry Griko from Arkaim Advisors notes an improved risk-reward ratio, particularly for companies less exposed to currency fluctuations and with diversified revenue streams.
Sales data from January reveals that Brazilian exports to the U.S. comprised just 12.8% of total exports, while sales to China represented 21.7%. Jennifer Gorgoll from Neuberger Berman suggests that Brazilian companies are relatively insulated from tariff impacts and indicates a cautious reinvestment in firms with solid fundamentals following the previously mentioned December market downturn.
Despite a nominal deficit at 8.45% of GDP, investor confidence in fiscal improvement remains precarious. Guido Chamorro from Pictet Asset Management observes that while the market has begun to factor in a degree of positivity, fiscal concerns continue to loom over the recovery of Brazilian assets.
In summary, Brazil’s bond market exhibits signs of recovery following a period of significant volatility due to fiscal concerns. Dollar corporate bonds are outperforming many emerging market counterparts, aided by favorable exchange rate movements and strategic market entries by local corporations. However, investors remain cautious, particularly regarding high domestic interest rates and fiscal policies under President Lula.
Original Source: financialpost.com
