Brazil's Top Trade Is to Bet on Lower Rates, Rio Hedge Fund Says

(Bloomberg) -- Betting on Brazil’s central bank to further slash the benchmark interest rate is the best way to make money in the nation’s assets right now, according to hedge fund Truxt Investimentos.

“With inflation under control and slow growth, our preferred trade right now is to receive rates in Brazil,” said Mariana Guarino, a portfolio manager at Truxt, which has 10.6 billion reais ($2.7 billion) in assets under management. “Once pension reform is approved, the tail risk of a quick fiscal deterioration will be removed, so Brazil’s central bank will have room to cut rates.”

Rio de Janeiro-based Truxt sees the central bank cutting the so-called Selic rate by 50 basis points twice this year, to 5.50%. Guarino sees a chance it falls even more, saying she doesn’t rule out a scenario with the benchmark rate falling to below 5%. Swap rates fell over the past days and are now showing the Selic 30 basis points lower by the end of October, almost six times the level seen just 10 days ago.

Faltering economic growth also factors into bets on rate cuts and on Truxt’s forecasts. Latin America’s largest economy shrank 0.2% in the first quarter, the first contraction since 2016. The hedge fund has recently lowered its growth forecast for 2019 to 0.7% from 0.9% -- economists in a central bank are seeing a 1.13% advance this year.

At the same time, a more uncertain global backdrop led Truxt to scrap its long position on Brazilian equities and build up a tactical short position on the S&P 500 Index ahead of expected volatility.

Local politics, whose ups and downs have kept investors on edge since President Jair Bolsonaro took office in January, are now marginally positive, according to Guarino. Markets have bought into the idea that Congress will lead the reform agenda regardless of the government’s difficulties in forming a coalition, according to her.

“Since Dilma Rousseff’s impeachment, we’re in a wait-and-see mode,” she said. “Now it looks like we’re heading to the reform’s approval.”

©2019 Bloomberg L.P.

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