Top Brazil Investor Warns of Fiscal Risk Amid ‘License to Spend’

(Bloomberg) -- Luis Stuhlberger is flagging an increase in Brazil risk as the country reverses its pledge to shore up fiscal accounts amid the Covid-19 pandemic.

“In a moment like this, it seems there’s a license to spend, and a 20 billion-real expense looks like a tip,” Stuhlberger, the industry veteran behind Verde Asset Management, said in a live transmission hosted by XP Inc. on Saturday. “Brazil will have to prove that it will be responsible.”

The nation’s Lower House recently approved a bill that provides financial aid to states and municipalities in order to compensate a drop in tax collection, fueling a clash between the executive and legislative branches. President Jair Bolsonaro reacted by saying Lower House speaker Rodrigo Maia was driving Brazil into chaos with “scandalous” proposals to increase public expenditure. The bill now needs to be analyzed by the Senate.

According to estimates from Verde, which has about 45 billion reais ($8.6 billion) under management, the country’s primary deficit is poised to account for 8% of gross domestic product. Brazil’s benchmark stock index has fallen 48% this year in U.S. dollar terms, the world’s worst performer.

“Brazil is a poor country, with lots of problems to solve -- so there’s no way the government wouldn’t help,” said Stuhlberger. “But in two years, the coronavirus crisis will cost us practically the equivalent of the whole pension reform, among revenue loss and increasing expenses -- assuming that these things won’t be permanent.”

While Stuhlberger’s Verde fund still has exposure to local equities, the bulk of its positions is abroad. In its latest monthly letter, the fund said a long position in U.S. stocks had become its top wager, even after conceding it bought at the dip too soon.

Verde’s flagship fund posted its worst month on record in March, down more than 11%. Since its inception in 1997, the fund has posted a total return of more than 16,000%.

“I wouldn’t say I’m not optimistic with Brazil anymore,” Stuhlberger said. “But challenges got bigger.”

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