Hedge Fund Makes a Bold Bet on Brazil Rates

(Bloomberg) -- A newcomer in Brazil’s booming hedge fund industry says the country’s interest rate cuts will have to run much deeper than most investors expect, defying calls that the easing cycle is close to an end.

Persevera Asset Management, a firm created by former executives at HSBC Holdings Plc in Brazil, expects Latin America’s largest economy to once again grow less than forecast. That will force the central bank to cut the key rate from the current 4.5% to as low as 3% this year.

“Small-sized companies and families are too leveraged, paying high interest rates that didn’t fall as much as the benchmark rate did,” says Guilherme Abbud, the firm’s chief investment officer.

While most traders are anticipating a final cut of 25 basis points to the key interest rate, two of Brazil’s biggest hedge fund managers, Rogerio Xavier and Luis Stuhlberger, have called on the central bank to stop with the rate cuts, with Xavier arguing they could bring potential risks to inflation targets down the line.

Policy makers are scheduled to announce their next decision Wednesday after markets close. Brazil’s yield curve is almost fully pricing in a cut, with bets intensifying after industrial production fell more than expected, adding to concern about the strength of the domestic economy.

One driver behind Persevera’s bold rate call lies in the outlook for inflation. Abbud says it’s “far from unlikely” inflation comes in at 3% this year, while economists in a central bank survey see it at 3.4%. Growth, meanwhile, will likely hover around 1.5%, he says, much lower than the average forecast of 2.3%.

A deeper rate cut could also prop up Brazilian companies’ earnings, with the asset manager seeing a potential 29% upside for local stocks. Its main equity holdings include sugar producer Sao Martinho SA and real-estate firm Cyrela Commercial Properties SA Empreendimentos e Participacoes, according to Fernando Fontoura, who manages stock investments.

©2020 Bloomberg L.P.

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