Citigroup and BCA Downgrade Brazilian Assets After Lula

Citigroup and BCA Research downgraded Brazilian assets after the re-election of Luiz Inácio Lula da Silva on Sunday (25.out). The institutions cited worsening in the risk-return relationship and concerns about fiscal policy and structural reforms under four more years of Lula’s government. The information is from the Reuters agency.

According to the agency, there are concerns that a looser fiscal policy, a more fragile dívida pública dynamic and a slow progress in economic reforms will put pressure on Brazilian markets. The decision reflects investors’ reassessment of the outlook for the next term.

Citigroup closes risk positions in Brazil

Citigroup has closed its bullish positions in Brazil. It withdrew its overweight recommendation on Brazilian shares and finalized its purchased position on the real.

“Although prices may fall beyond fair levels, the market was bought before the outcome, which makes an overshooting plausible. Given the result of the election, we close our risk position in Brazil,” Citi said in a statement.

The American bank justified the change by the deterioration of the risk-return relationship for Brazilian shares, bonds and currency. The source did not detail the values involved in the closed positions.

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BCA downgrades Brazil against emerging markets

BCA Research downgraded Brazil in relation to emerging markets. He said Lula’s victory “closes the prospect of an orthodox government that would deliver structural improvements in Brazil’s fiscal accounts and growth potential.”

The BCA also downgraded Brazilian government bonds in local currency and the country’s sovereign credit, both going from overweight to underweight. The institution mentioned the deterioration of the dynamics of dívida pública as the main factor for the change.

JPMorgan had already downgraded the recommendation for the Brazilian real and public bonds from overweight to marketweight (in line with the average) after Lula’s victory. JPMorgan’s decision predates the shares of Citi and BCA.

Market reacts with strong volatility

Lula was re-elected on Sunday (25.out), with 51.78% of the valid votes, against 48.22% of Senator Flávio Bolsonaro (PL). Lula’s victory surprised the market, as the PL candidate finished the first round ahead and also led the electoral polls of the second round.

With the result, the market began to reassess the outlook for fiscal policy, interest rates and exchange rates in the next term. Investors hoped that a possible government of Flavio would be more disciplined with public accounts.

B3 halted trading after Ibovespa recorded a drop of more than 10% from the previous close. By the rules, the mechanism suspends operations for 30 minutes at that level.

Circuit breaker is triggered on B3

The circuit breaker is used to temporarily interrupt trades in times of high volatility. The measure seeks to give investors time to reassess their decisions and reduce the risk of disorderly movements in the market.

The last time the Brazilian Stock Exchange had triggered the mechanism was in March 2020, during the COVID-19 pandemic. In that month, disruptions occurred 6 times because of turbulence in international markets.

In addition to the uncertainty about the upcoming fiscal decisions of the Lula government, the possibility of judicial questions about the electoral result is also seen as a factor of uncertainty for the markets.

Political Uncertainties and Next Steps

After the defeat, Flávio Bolsonaro stated that he could request the annulment of the election. Then he said he would ask for the cassation of Lula-Alckmin. These statements add volatility to the political and economic landscape.

Investors are now monitoring the next steps of the elected government and market reactions. It is expected that decisions about the economic team and the first fiscal measures will define the course of Brazilian assets in the coming weeks.

For the reader of Ponta Grossa and region, turbulence in the markets can affect investments, interest and cost of living. Follow the updates on the Boca no Trombone portal to understand the unfoldings.

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