Citi, BCA downgrade Brazilian assets after Lula election victory
Citigroup and BCA Research have downgraded Brazilian assets following Luiz Inácio Lula da Silva's election win, citing worse risk-reward profiles for equities, bonds and the currency amid concerns over fiscal discipline.
Citigroup and BCA Research have downgraded Brazilian assets following Luiz Inácio Lula da Silva's election victory, arguing that the risk-reward profile for equities, bonds and the currency has worsened as investors reassess prospects for fiscal discipline and structural reforms under the new administration, according to reports on 27 October.
The calls reflect a broader shift in investor sentiment, with strategists warning that looser fiscal policy, weaker public debt dynamics and slower progress on growth-enhancing reforms could weigh on Brazilian markets despite constraints from a more conservative Congress.
Citigroup on Monday exited its bullish Brazilian positions after Lula's election win, closing its "overweight" equities call and its long position on the Brazilian real. "While prices may well fall beyond fair levels, the market was long going into this, which makes an overshoot plausible. Given the outcome of the election, we close our Brazil risk," the bank said.
Brazilian assets plunged on Monday, with the Brazilian real tumbling more than 11 per cent against the US dollar and the benchmark Bovespa equity index slumping 13.9 per cent for its biggest one-day decline since March 2020. Investors expect recent bets on a change of government to unwind.
BCA Research on Monday downgraded Brazil relative to emerging markets, saying Lula's victory "ends the prospect of an orthodox government that delivers structural improvements to Brazil's fiscal accounts and potential growth." The firm cut Brazilian equities to "underweight" from "neutral," citing rising default risks, weaker growth prospects and inflation pressures from a softer currency. It also downgraded Brazilian local-currency bonds and sovereign credit to "underweight" from "overweight," warning of deteriorating debt dynamics.