Jpmorgan Brazil Investment Share Discussion Threads

[loganair] 10/7/2019 22:24

JPB now at a massive 24% discount to NAV.

[loganair] 10/7/2019 21:43

If the BRL exchange rate increase by 10%, that alone to add 7p to the JPB share price.

[loganair] 10/7/2019 21:34

The positive momentum favouring the imminent passage of the Social Security Reform continues, with the goal to conclude the Lower House approval by the weekend. Such an impressive result should trigger a BRL rally, but the rally would be limited by the central bank’s willingness to cut rates, by as much as 150bp, which has reduced the currency's appeal.

We are nearly there:

After years of negotiations, and much political turmoil, it finally appears that we are days away from the approval of the social security reform by the Brazilian Congress. The pro-reform momentum improved sharply last week, with the approval of the reform by a wide margin in the Lower House’s Special Committee, and with Speaker Rodrigo Maia standing out for his leadership and savvy command of the House.

In fact, congressional leaders aim to fast-track the debate and have the reform fully approved by the Lower House, which requires a 3/5 majority support in two rounds of the vote, by the weekend. Such an impressive result would consolidate Maia’s reputation and would bode well for the ambitious post-reform agenda advocated by the Speaker, which is broadly consistent with the agenda of the Bolsonaro administration, and includes the tax reform and the formal independence of the central bank.

There remains some uncertainty about the timing and the content of the draft that the House should eventually approve. Passage of the proposal already approved by the Special Committee last week would be a favourable outcome.

But the text could be improved with an amendment to, at least, facilitate the extension of the reform to states and municipalities, or it could worsen with, for instance, the easing of the retirement rules for police workers, as advocated by Bolsonaro.

As it stands, the reform could generate savings of about BRL 0.9-1 trillion in 10 years, which is far higher than initial investor expectations and reflects a very mild dilution in the fiscal savings initially proposed by the Bolsonaro administration (BRL 1.1 trillion).

This result would go a long way towards ensuring the long-term sustainability of Brazil’s fiscal accounts and should be enough to prompt a reassessment of the near-term credit ratings trajectory for Brazil. But actual upgrades may take a while longer and should depend, in our view, on the evidence of a stronger recovery in economic activity, which is expected to pick up pace in the second half of the year.

Reform approval would green-light the monetary easing process:

The approval of the reform should have an invigorating impact on the outlook for economic activity, but the reform should also have a benign impact on the inflation outlook. As a result, the reform’s approval should not prevent the central bank from adding to the monetary stimulus that is already in place.

In fact, given the (1) ongoing improvement in current inflation trends, as illustrated by falling and fully-anchored inflation expectations, (2) the expected post-reform appreciating bias for the BRL and (3) the dovish shift seen in central banks across the world, we believe the balance of risks favours a larger, more frontloaded and more lasting cycle than currently priced in the local curve.

Central bank officials have been on the defensive in their effort to justify their reluctance to ease monetary policy, despite the poor economic activity data and high unemployment. Inaction was generally justified by the lingering uncertainties regarding the passage of the social security reform. But with the reform approved and the yearly rate trending considerably below-target, at around 3-3.5% throughout 2H19, the central bank’s ability to justify inaction should weaken materially.


Fully anchored inflation expectations and ample spare capacity.

The BRL could lag other local assets:

With the reform approved, political uncertainties related to the sustainability of fiscal accounts should ease materially and prompt an improvement in the outlook for economic activity and for local assets in general.

The Brazilian Real should also rally, but the extent of that rally should be limited by the central bank’s willingness to cut rates (by as much as 150bp), which should reduce the currency’s appeal. Lower rates should also incentivize the use of the USDBRL as a (relatively cheap) hedge to external risks, such as trade wars, as other local assets such as equities and rates are seen as more appealing.

In addition, as indicated by central bank officials recently, the lower cost of financing in BRLs has also reduced the inflow of USDs in Brazil this year. And this shift could intensify post-reform, as the SELIC policy rate is further reduced and the local debt capital markets deepen further. As a result, we now believe that the post-reform trajectory for the USDBRL may bottom at a higher level, closer to 3.6 than 3.4.

In any case, with the reform approved this week or next, we would expect the Brazilian central bank to be able to launch the easing cycle in its 31 July meeting, possibly with a 50bp cut. This would bring the SELIC rate to a fresh record-low of 6.0%, from 6.5% now. Consecutive 50bp cuts would bring the SELIC rate to 5.0% by the end of October, but a shallower or less-frontloaded cycle should not be ruled out.

A more frontloaded cycle would be amply justified as a catch-up measure needed to help address the paralysis in economic activity seen in recent quarters. The central bank’s own projection for 2019 GDP growth collapsed recently, moving from 2.0% as of the end of 1Q19 to just 0.8% as of the end of 2Q. And, as the chart below illustrates, Brazil’s GDP remains 5.5ppts below the peak seen in 2013.

Disappointing economic activity and a long way to go to full recovery:

[loganair] 07/6/2019 21:14

Brazil's Supreme Court voted to allow the government to sell subsidiaries of state companies without congressional approval, making it easier for President Jair Bolsonaro's administration to raise money, cut debt and attract private investment as the economy struggles.

The decision Thursday evening also allows the country's largest state enterprise, oil major Petróleo Brasileiro SA, or Petrobras, to continue its sale of noncore assets.

With the decision, the Bolsonaro administration will now be able to carry out its plan to sell as many as 100 businesses more quickly than would have been possible if it needed to go through the country's splintered Congress. The cash-strapped government aims to raise $20 billion through asset sales this year apart from the sale of Petrobras' assets.

Getting congressional approval "would have added months or even years to a privatization process, especially considering that this administration lacks an organized base of support" in Congress, said Leonardo Barreto, a political consultant in Brasília.

Dozens of parties are represented in Brazil's Congress and the administration has had a difficult time getting legislation approved because Mr. Bolsonaro's party doesn't have a majority in either house.

The Brazilian government owns all or part of more than 130 companies. In addition to Petrobras are lenders Banco do Brasil SA and Caixa Econômica Federal, news agency EBC and South America's biggest electric company, Centrais Eletricas Brasileiras SA, or Eletrobras.

"The majority of the businesses the government plans to sell aren't parent companies, they're subsidiaries," said Solange Chachamovitz, chief economist at ARX Investimentos. "The decision removes considerable legal uncertainty and clears the way for the economy to become more productive."

Thursday's decision was based on an article in the 1988 constitution that says state companies can only be created when needed for national security or for "relevant collective interest," and with congressional approval. The justices inferred that selling those same firms must require lawmakers' vetting, but that selling subsidiaries doesn't.

The door remains open for allegations that privatizing controlling companies like Petrobras, Banco do Brasil and CEF wouldn't need lawmakers' blessing, said Marcio Holland, an economist from Getulio Vargas Foundation who has researched Brazil's state enterprises.

"The 1988 constitution establishes state participation in the economy as the exception, not the rule," he said. "Because these companies were created before the constitution, it can be argued that their privatization wouldn't require congressional approval."

[loganair] 13/5/2019 13:40

The year before the trade dispute between the US and China, the US imported 40m tons of Soya Beans, in the past year this has fallen to only 6m tons. A good amount of this difference will be picked up by Brazil selling to China.

[loganair] 10/5/2019 09:07

Any trade war or increase in tariffs between the USA and China will be positive for the Brazilian agriculture sector as China will import more food stuffs from Brazil as it will import less from the USA.

[loganair] 22/4/2019 21:57

Brazil: Growth recovery is slowing down - BBVA:

Analysts at the Research Department at BBVA, lowered their growth forecast for the Brazilian economy for 2019 and 2020. They expected USD/BRL to rise to 3.95 by year-end.

Key Quotes:

“The deceleration in the world economy, as well as slow and limited progress in the local adoption of economic reforms –particularly in the social security- will limit the economy’s capacity for growth in the coming years.”

“We expect GDP to grow 1.8% in both 2019 and 2020, slightly above the 1.1% growth recorded in each of the previous two years. Our forecast for 2019 has been adjusted downwards by 0.4 p.p., mainly due to poor incoming activity data, while the forecast for 2020 has remained constant Inflation will remain relatively under control, but will be higher going forward than in the previous two years. The progressive - albeit timid - recovery in domestic demand, the depreciation of the exchange rate and the normalization of food prices will contribute to the upward trend in domestic inflation.”

“The SELIC interest rate will remain at the current expansionary level for a long period. While weak domestic demand and the more accommodative tone of monetary policy in the US make an upward adjustment unlikely in the short term, rising inflation and fiscal risks leave little room for cuts.”

“The shift towards more accommodative policies by the main central banks has reduced financial tensions in both global and local markets. Thus, the exchange rate has neared US$3.8 and could remain close to this level for some time. But the slow progress of both the economy and reforms, as well as the deterioration in the terms of trade, support the forecast of depreciation up to 3.95 at the end of 2019 and 4.05 at the end of 2020.”

[loganair] 16/4/2019 11:08

HSBC say they like Emerging Markets and they like India, China and Brazil most of all.

[loganair] 30/3/2019 22:32

There are two simple reasons for the sell-off: one, profit taking. The first sign of weakness in the government was bound to trigger a sell-off. Brazil’s been a money maker since Jair Bolsonaro was elected in October, so why not take some money off the table the first sign of duress? This has been going on since February.

The second reason is politics: Investors are less confident in key reforms, especially pension reform. There is no united front rallying around Bolsonaro on anything related to the economy.

Earlier this week, Barclays Capital lowered its growth forecast for Brazil to 2.2%, rising to 2.6% next year.

[loganair] 21/3/2019 14:33

The Brazilian government wants trade to represent 30 percent of the country’s gross domestic product by the end of 2022, with one official saying on Wednesday it will get there on the back of President Jair Bolsonaro’s liberalization plans.

According to the International Monetary Fund, Brazil’s trade flows, including exports and imports, average around 25 percent of its GDP, which makes the country one of the least open among the G20 group of the world’s most industrialized nations.

[loganair] 20/3/2019 13:44

Brazilian stock market reaches another all time high.

[loganair] 13/3/2019 22:19

Latin America: A region with challenges by Scott Hazelton:


Brazil’s economic outlook is clouded by political and policy uncertainties. Bolsonaro, the new President of Brazil, will soon have to deal with a sizable fiscal deficit fuelled by a growing shortfall in the nation’s pension system.

In principle his agenda is pro-business, but he may lack the ability to bring consensus and pass much needed reforms in Congress. We expect delays and changes to the already proposed pension and tax reforms, and this will delay investment projects. The outlook for Brazil is one of sluggish growth.

Although we forecast acceleration in 2019, we expect only mild pension reform and businesses will not be convinced that the country will see fiscal consolidation. It may take three to four years to bring the fiscal deficit to manageable levels (below 3% of GDP). Apart from pension reform, the government will have to implement fiscal reform to simplify the tax system.

One advantage in the region is the so-called demographic bonus: all countries in the region have relatively large and young populations, which are expected to support economic growth in the next 10–15 years. However, challenges do lie ahead, namely the ability of the economies to make use of this future labour force.

[bishan bedi] 26/2/2019 10:29

Good historical base rates here. Not sure the carry trade is happening on the scale it used to.

I do expect Brazil to rocket in the coming years IF (big if) they can a) get the pension reforms through and b) sort out the ludicrously complicated tax system

EDIT: and c) have a crack at reducing capital controls

So much potential, but a mountain to climb to get there

[loganair] 26/2/2019 10:09

I understand that money is also flowing into Brazil as a 'carry trade' due to their high interest rates.

[loganair] 20/2/2019 22:54

The new president of Brazil has put forward a plan to revamp the country's pension system - tackling a reform considered critical to boosting growth of South America's biggest economy.

The proposal would set a minimum retirement age of 65 for men and 62 for women, among other changes.

The proposal include a sharp tightening in the granting of welfare benefits and an increase in the social security contribution rate for different salary ranges.


"We need to change the rules of the pension system," said Leonardo Rolim, the official responsible for pensions at the Economy Ministry.

"People are living longer and women have fewer children, which means that the working population will decrease."

[loganair] 15/2/2019 14:33

After any pension reforms there'll then need to be Labour/Employment and Tax reforms