Falta de ajuste fiscal “suga todo o oxigênio da sala”, diz o UBS

The lack of a credible fiscal adjustment is "sucking all the oxygen out of the room," according to UBS. Alejo Czerwonko, UBS Global Wealth Management's CIO for emerging markets in the Americas, told Brazil Journal, "When you have debt equivalent to 80% of GDP, a deficit of 10% of GDP and interest rates of 14% to 15% a year, it's like breathing on fire."

At a Milken Institute event in São Paulo, Czerwonko said global investors should increase exposure to emerging markets, adapting portfolios to a rapidly changing world. The main points of the conversation are as follows. What is your view on the Brazilian market? Is there still a case for investing here? Assessing the Brazilian market involves balancing two opposing thoughts.

On one hand, the world needs Brazil. In a tense and conflict-prone multipolar environment, there is a greater focus on security – energy, food, technology and finance. Brazil offers partial solutions to all these challenges, which is positive for local assets. The bad news is that the fiscal issue, which was already a challenge, has worsened.

Anyone can see that a country with 80% of GDP in debt, a deficit around 10% of GDP and interest rates in the 14% a year range is unsustainable. This affects monetary policy and the pace of economic expansion. Our base case assumes leaders recognize the need to act - President Lula's recent speech reflects this timidly - but we still need a credible adjustment and a plan to get support from Congress.

The country needs to learn a fiscal lesson to avoid even more severe pressure on asset prices, but perhaps not enough to lead to sustainable valuation appreciation. Apart from the fiscal issue, what institutional risks concern investors? To be honest, this is not the focus of global investors. There is no perception of relevant institutional erosion.

Institutions are under pressure everywhere, so Brazil doesn't stand out negatively in this aspect. The central bank can still act within its mandate. There is also no concern about each power's ability to perform its functions - Executive, Legislative and Judicial. The fiscal issue remains the number one priority, number two and number three.

In this scenario, which investments are recommended for Brazil? We maintain a neutral recommendation for Brazilian assets. We are in a wait-and-see posture, waiting to see how the fiscal issue evolves to better understand the risk premiums. The only exception is the currency: we use the Brazilian real in carry trade baskets, combining with currencies of other emerging markets, such as the Mexican peso.

Unfortunately, when you have debt equivalent to 80% of GDP, a deficit of 10% of GDP and interest rates of 14% to 15% a year, it sucks all the oxygen out of the room. Until the fiscal sustainability issue is addressed seriously, it will continue to overshadow the fact that Brazil has companies with solid results. It's true that for a patient, medium-term investor, the stock market and fixed income offer attractive premiums.

At current prices, it's possible to obtain attractive returns in three to five years. However, you must consider that the situation could worsen before it improves. Some domestic managers have been buying stocks of exporters, underleveraged companies with high cash generation. But even these companies are affected by this scenario, right?

No matter, the risk cannot be escaped. It's true that it reduces portfolio risk, but it doesn't mean you're immune.