Citigroup and BCA Research downgraded Brazilian assets after Lula da Silva's election victory. The Brazilian real tumbled more than 11% against the US dollar and the Bovespa index fell 13.9% on Monday.
Brazilian assets plunged on Monday as Citigroup and BCA Research downgraded Brazilian assets following Lula da Silva's election win. Both firms argued that the risk-reward profile for equities, bonds and the currency has worsened.
Real and Bovespa plunge
The Brazilian real tumbled more than 11% against the US dollar on Monday. The Bovespa equity index slumped 13.9%, its biggest one-day decline since March 2020.
Investors expect recent bets on a change of government to unwind. Strategists warn 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.
Citi closes its bullish positions
Citi exited its bullish Brazilian positions on Monday, closing its "overweight" equities call and its long position on the real. However, the bank said prices may well fall beyond fair levels, because the market was long going into the election and an overshoot is plausible.
Even so, Citi concluded: "we close our Brazil risk."
BCA cuts equities, bonds and credit
BCA Research 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. It cut Brazilian equities to "underweight" from "neutral," citing rising default risks, weaker growth prospects and inflation pressures from a softer currency.
The firm also downgraded Brazilian local-currency bonds and sovereign credit to "underweight" from "overweight," warning of deteriorating debt dynamics.
Source: Investing.com
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