With Selic rate at 10.5%, UBS reduces exposure to equities in Brazil (2024)

UBS’s wealth management area in Brazil adjusted its risk projections to reflect higher interest rates for longer here and in the United States and a scenario of greater volatility ahead. With the U.S. Federal Reserve’s expectations of cuts being dashed, the White House succession, the weakened real, and the perception that Brazil’s policy interest rate will remain at 10.5% per year, investors have no reason to rush to seek value from assets with a greater return potential, such as equity, debt, or long inflation-indexed bonds.

At the macroeconomic level, concerns about the trajectory of Brazilian debt gained emphasis compared to the international scene and led local assets to perform worse than the average of their emerging peers in the first half of the year. The result was a depreciation of the real and Brazilian shares and an increase in future interest rates, both nominal and real.

As a response, UBS reduced the equity portion in its portfolio and increased its interest-rate positions in floating-rate securities to take advantage of double-digit yields. While the foreign exchange rate is fluctuating and there are no clear triggers to reduce the aversion feeling, it is worth taking advantage of fixed income yields.

“Ultimately, what could untangle this knot is the perception of the Brazilian fiscal program going forward,” said Luciano Telo, chief investment officer Brazil at UBS Global Wealth Management, when commenting on the change in allocation, in an interview with Valor. “We understand that the NTN-B [B-series National Treasury Note] paying 6.40% real interest rate [6.5% on Wednesday, 3] is very attractive. We also understand that the stock market is trading at a discount. But there’s no need for doing that now.”

On the stock market, foreign investors sold more than net R$40 billion in shares this year, with Brazil off the radar of foreign capital. Domestic investors have 10.5% of the starting CDI (the interbank deposit rate, used as an investment benchmark in Brazil). So far, UBS’s recommended portfolios were overallocated to Brazilian stocks, considering that, as interest rates fell, investors would take advantage of reduced prices. That’s not what happened.

“I understand that it [stock market] is discounted, but I cannot be much above the historical average if I have a fixed income alternative that is paying well, with lower volatility, if there is no price catalyst [capable of] quickly driving the stock market,” Mr. Telo points out.

Since April, when it became clear that the cuts in U.S. interest rates would be postponed, coming in smaller moves, the decompression in Treasuries rates was not followed suit by assets in Brazil. “The favorable correlation according to which an improvement abroad could improve [the market] here was broken,” Mr. Telo said. “From the second quarter onwards, it is about the domestic situation. The market has done its calculations: there is not enough strength abroad, there are not enough [interest rate] cuts so that, regardless of what happens here, the assets could move,” he said. According to Mr. Telo, an improvement in both international and domestic scenarios would be required to ensure that the debt/GDP trajectory is sustainable.

The Brazilian fiscal issue moved to the center of the discussion and a solution seems to be unclear. The government is yet to announce a spending freeze, which could occur at the end of July or only when the budget review for 2025 advances on the calendar. Mr. Telo believes investors tend to remain wary, avoiding structural risk-taking positions, given the absence of a change in expectations driven by deep spending cuts and compliance with the fiscal target.

UBS also made other moves to reduce its portion in inflation-indexed bonds and its position in real interest rates. Although an increase in the Selic is not in the scenario after the unanimous decision of the Monetary Policy Committee (COPOM) to keep the rate unchanged, carrying CDI-indexed securities seems to be the best choice. “That reduces volatility and offers a good return,” Mr. Telo said. “In the case of inflation-indexed bonds, there are built-in interest rate increases until the year-end, which I think is less likely at this point. There is no need to increase it. We have to wait and make sure there will be no bad news.”

The foreign exchange rate is a concern, with the real placed among the most depreciated currencies this year among emerging or developed peers. “The fixed income premium is there, as economic agents have no confidence while the exchange rate continues to depreciate. The hypothesis of having to re-anchor expectations with [higher] interest rates remains in the scenario.”

The executive points out that given the level of foreign exchange reserves and the good shape of external accounts, the real could have the potential to appreciate. However, local uncertainties have made high interest rates insufficient to curb foreign exchange.

In strategies linked to real interest rates, the UBS executive says there is value to capture and NTN-B is historically a good asset. “What is the question? The same thing that happened with the exchange rate is happening with the NTN-B, with inflation-related assets, which continue to increase rates. Every day there is a harder market [price] update.”

The change in command at the Central Bank at the end of the year, with the end of Roberto Campos Neto’s term, is another source of concern, with President Lula’s open friction with the current monetary policy. “The consensus at the Central Bank was positive, a very important sign of the COPOM’s sensitivity to the uncertainties that concern the market,” Mr. Telo says. “Every central bank in the world has to create a reputation, that’s how it is supposed to be.” The executive points out that the fact that the presidential term in Brazil does not coincide with the exchange in command at the Central Bank is an institutional gain. “The Central Bank provided a unanimous guidance of a 10.5% rate until the end of the year, so the market has a reference on how it should operate.”

The last months of 2024 coincide with the presidential election in the U.S. If Donald Trump wins the race there could be changes to immigration policy and import tariffs. These are elements that can pressure inflation in the U.S., leading to high interest rates for longer. That is a combination that could favor a strong dollar, which is not good for emerging markets.

UBS’s portfolio in reais has a structural position on the global stock exchange, although it is slightly under-allocated compared to the historical average. With the expected soft landing of the U.S. economy, there are also opportunities in bonds abroad, Mr. Telo points out. “The dollar gained ground this year and there is an opportunity for further increases in these global positions,” he said, despite a rise in the Treasuries nominal rates due to the election. “There could be some concern later this year but in the medium to long term we see the yields of U.S. corporate and sovereign bonds falling.”

Translation: Liliana Hage

With Selic rate at 10.5%, UBS reduces exposure to equities in Brazil (2024)

FAQs

What is the Brazil selic rate? ›

The SELIC Rate ended 2022 at 13.75%, up from the 9.25% end-2021 value and up from the reading of 10.00% a decade earlier. For reference, the average policy rate in Latin America was 18.90% at end-2022.

What is the lending rate in Brazil? ›

Bank Lending Rate in Brazil decreased to 52.46 percent in February from 52.57 percent in January of 2024. Bank Lending Rate in Brazil averaged 72.55 percent from 1994 until 2024, reaching an all time high of 254.28 percent in April of 1995 and a record low of 37.20 percent in December of 2020.

What is the current policy rate in Brazil? ›

Brazil cash rate (Policy Rate: Month End: SELIC) was set at 10.50 % pa in May 2024, compared with 10.75 % pa in the previous Apr 2024. Brazil Policy Rate averaged 12.25 % pa and is updated monthly, available from Mar 1999 to May 2024.

What is the selic rate in 2024? ›

The Central Bank's latest Focus Report, a weekly survey of leading banks and investment firms, shows increased market projections for the country's benchmark interest rate in 2024. The median of analysts' estimates for the Selic rate jumped from 9.75 to 10 percent at the end of this year.

Why is Brazil's interest rate so high? ›

Brazil has a relatively low level of domestic savings.

Hausmann (2008) argues that Brazil's low domestic savings is the most binding constraint to growth and the reason for its high real interest rates. A similar argument about the effect of low savings on real interest rates is made by Fraga (2005).

How is interest rate calculated in Brazil? ›

In Brazil, interest rates are based on a 252-business day year comprising 12 months of 21 business days, the so-called 252 exponential convention. This format applies to the Selic rate and the DI rate. Capitalization occurs only on business days in the period between the investment date and the redemption date.

Is 7% a good loan rate? ›

A good personal loan interest rate depends on your credit score: 740 and above: Below 8% (look for loans for excellent credit) 670 to 739: Around 14% (look for loans for good credit) 580 to 669: Around 18% (look for loans for fair credit)

What is a good Lending Rate? ›

But a good rate for you depends on your credit score. For example, if you have excellent credit, a rate below 11 percent would be considered good, while 12.5 percent would be less competitive.

Who has the highest lending interest rates in the world? ›

Lending interest rate - Country rankings

The average for 2022 based on 91 countries was 11.75 percent. The highest value was in Zimbabwe: 131.81 percent and the lowest value was in Italy: 2.26 percent. The indicator is available from 1960 to 2022.

Does Brazil have a high interest rate? ›

The nominal rate has averaged 13.25 percent and the real rate 6.14 percent. This is an extremely high real interest rate over this period, which also appears unexplainable from any known risk factors.

What is the risk level in Brazil? ›

Brazil - Level 2: Exercise Increased Caution. Reissued with updates to Country Summary. Exercise increased caution in Brazil due to crime. Some areas have increased risk.

What is the exchange rate system in Brazil? ›

The Brazilian exchange rate has been both fixed and floating at different times. When it was established in 1994, the Real was fixed to the USD, though in 1999, the Real became floated to the USD, which is its current position.

What is the target rate of selic in Brazil? ›

BACEN SELIC rate - Brazil Brazilian Central Bank interest rate
DateRate
05-08-202410.50 %
03-21-202410.75 %
02-01-202411.25 %
12-13-202311.75 %
6 more rows

What are selic rates? ›

The Selic rate, or 'over Selic', is the Brazilian federal funds rate. Precisely, Selic rate is the weighted average interest rate of the overnight interbank operations — collateralized by federal government securities — carried out at the Special System for Settlement and Custody (Selic).

What is the savings rate in Brazil? ›

Key information about Brazil Gross Savings Rate

Brazil Gross Savings Rate is updated quarterly, with data available from Mar 1991 to Mar 2024, and an average rate of 16.6%.

What is the mortgage rate in Brazil? ›

Lastly, the mortgage loan interest rate increased in November, reaching 10.7% per year (vs. 10.7% in Nov 2023 and 9.2% in Dec 2022). In December 2023, the index for civil construction in Brazil (INCC), remained on its stabilization path close to its lowest level since 2004, at 3.3% (vs.

What is the inflation rate in Brazil? ›

Consumer price inflation in Brazil averaged 6.2% in the ten years to 2022, below the Latin America regional average of 8.4%. The 2022 average figure was 9.3%.

What is the interchange rate in Brazil? ›

Interchange fees for debit cards currently are from a joint weighted average calculation of 0.5% and a maximum value per transaction of 0.8%, Reuters reported. Under the revisions by the BCB, debit card interchange fees will now be capped only by 0.5% per transaction.

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