Brazilian Hedge Funds Are Betting Big on Stocks

(Bloomberg) -- Brazil’s top hedge fund managers are increasing bets that the stock market will be the best place to profit from the government’s expanding reform agenda.

Firms including Verde Asset Management, which has almost 40 billion reais ($10.1 billion) under management, and Bahia Asset Management increased their holdings of local equities after the pension system overhaul cleared its biggest hurdle in the lower house last month. BlueLine Asset Management, which recently launched its first fund, is favoring Brazilian shares over all other asset classes in Latin America.

“Brazil has the chance to approve two important reforms this year -- pension and tax -- and there’s an ongoing, global process of falling interest rates,” BlueLine’s Chief Investment Officer Giovani Silva, said at an event on Wednesday in Bloomberg‘s Sao Paulo office.

After Brazil’s lower house approved the pension reform in a second-round this week, the bill, which foresees savings of about 930 billion reais over 10 years, moves to the Senate. The reform’s outcome was “better than the most optimistic forecast” from some months ago, Verde said in a monthly note to clients. “It puts the country into a healthier fiscal trajectory and allows for structurally lower interest rates.”

While growth has failed to rebound strongly and unemployment sits at 12%, President Jair Bolsonaro’s economic team is pushing forward with plans to reduce bureaucracy, fix fiscal accounts and boost investment through reforms and privatizations. The government has gotten a hand from lower house Speaker Rodrigo Maia in whipping votes for pension reform and from the central bank which cut the country’s benchmark rate last week to a record low of 6%.

Sara Delfim, a partner at Dahlia Capital, sees the Brazilian economy poised to grow at a moderate pace, but for a prolonged period. That should be positive for the stock market and allow rates to fall even further, to below or around 5%. Delfim has been favoring electric utilities and consumer names, while keeping some distance from banks and commodity companies.

“We believe that the tax reform, the sanitation bill, the telecom bill, privatizations and new concessions will all move forward,” Delfim said.

Earlier this week, Bahia Asset said it has boosted its net long position in Brazilian stocks, favoring companies that benefit from the flattening of the curve or that may post a “sizable improvement” in their results due to operating leverage. Kapitalo Investimentos increased its bet on three specific sectors: Paper and pulp, steelmakers and banks.

Brazilian equities have gained 14% year-to-date in U.S. dollars even as foreigners have stayed mostly on the sidelines. Offshore investors have pulled about 10.4 billion reais out of Brazilian stocks through July 31, according to data from the stock exchange.

Joao Braga, whose XP Long Biased fund is one of the nation’s best performers of the past five years, says it’s still too early for foreign shops to buy Brazil’s turnaround pitch.

“The pension reform isn’t a trigger for foreign investors,” said Braga. “They should get more excited when economic activity recovers, which should take place close to the end of the year, with more reforms.”

--With assistance from Aline Oyamada.

To contact the reporters on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net;Felipe Marques in Sao Paulo at fmarques10@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Daniel Cancel, Julia Leite

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