Investors still optimistic about pension reform, but warn of volatility

. Apr 02, 2019
stocks pension reform brazil investment banks Volatility has become the new normal in Brazil

Ibovespa’s collapse in March made investors realize the road to pension reform bill will not be an easy one, but that did not wreck their faith that it may lead to a positive outcome, judging by Brazil’s recommended portfolios for April.

Brazil’s benchmark stock index lost 0.18 percent during the month—right after reaching its 100,000-point historical peak—due to a political crisis that spread jitters across the market. Fears that the fight between House Speaker Rodrigo Maia and President Jair Bolsonaro could get in the way of the reform made the stock market index crash by more than 3 percent in a single day, while the U.S. Dollar reached BRL 4.00 for the first time in 2019.

Shortly after, Economy Minister Paulo Guedes stepped in, and both Mr. Maia and Mr. Bolsonaro put their squabble on ice. In a note to clients, analysts Mirae Asset highlighted how important this intervention was, with Mr. Guedes “adopting a posture of pacification and rapprochement between the Executive and Legislative [branches] that should ensure progress of the pension bill. If this happens in a fast and non-traumatic way, we may have signs of evolution for the local stock market.”

</span></p> <p><span style="font-weight: 400;">The firm has maintained its <a href="">recommend stocks portfolio</a> for April, including B3, Banco do Brasil, CCR, Cosan, Iochpe-Maxion, Petrobras, Randon, Rumo, Sanepar, and Usiminas. </span></p> <p><span style="font-weight: 400;">Others are starting to brace themselves for tougher times after the shock. Analysts at XP Research warned that March was an example of what is yet to come and, therefore, investors should be prepared.  </span></p> <p><span style="font-weight: 400;">“The following months will bring tough negotiations towards the pension reform and we believe times of stress like we‘ve seen in the past couple of weeks are likely to happen again. We remain positive for the medium and short terms, believing in the bill’s progress. However, we expect volatility and recommend to keep portfolios protected through names such as </span><a href=""><span style="font-weight: 400;">Vale</span></a><span style="font-weight: 400;"> and JBS.”</span></p> <hr /> <p><img class="size-large wp-image-15329 aligncenter" src="" alt="stocks pension reform brazil investment banks" width="1024" height="722" srcset=" 1024w, 300w, 768w, 610w, 1356w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <h2>Pension reform outlook: cautious optimism</h2> <p><span style="font-weight: 400;">Following the same direction, BTG Pactual analysts added pulp and paper producer Suzano, and reinsurance company IRB Brasil to their portfolio—the former, for its exposure to revenues in USD, while the latter enjoys a favorable short-term momentum, according to a note to clients.</span></p> <p><span style="font-weight: 400;">The bank also adjusted its estimates for the pension reform&#8217;s approval in the House: from this year&#8217;s second quarter to the third quarter. The analysts also believe </span><a href=""><span style="font-weight: 400;">the bill will probably be watered down in Congress</span></a><span style="font-weight: 400;">, assuring savings of around BRL 600 to 700 billion in a decade (the original promise was of BRL 1 trillion), but which will cheer up the market nonetheless.</span></p> <p><span style="font-weight: 400;">“We believe that if the reform passes, the Ibovespa could quickly move to trade at one standard deviation above average, at some 117 thousand points, an upside of 22% from current levels,” they wrote. </span></p> <p><span style="font-weight: 400;">Analysts also called attention to the fact that foreign investors are still unsure about Brazilian equities, probably waiting for some clear signals about the pension reform bill. Citing data from intelligence firm EPFR, they note that global funds&#8217; exposure to Brazilian equities reached 0.52 percent in February; ten years ago, it was 2.4 percent. “We see room for foreign investors to increase their exposure to Brazil, and they will certainly do so once the social security reform advances,” the analysts said. </span></p> <hr /> <p><span style="font-weight: 400;"><img class="alignnone size-large wp-image-15330" src="" alt="stocks pension reform brazil investment banks" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></span></p> <hr /> <p><span style="font-weight: 400;">Undoubtedly, pension reform developments will continue to be the main driver of the Brazilian market. As recalled by analyst Thiago Salomão at brokerage firm Rico, the discussion in the House’s Constitution and Justice Committee will define the month, as well as Mr. Guedes’ visit to that same committee next week. </span></p> <p><span style="font-weight: 400;">However, it is not only investors who are adopting a wait-and-see approach. The Central Bank&#8217;s Focus survey among economists showed another decline in market consensus for Brazil&#8217;s 2019 GDP growth. It now stands at 1.98 percent, versus 2.53 percent at the beginning of the year. Both </span><a href=""><span style="font-weight: 400;">consumer and business confidence</span></a><span style="font-weight: 400;"> indexes measured by think tank FGV have fallen in March. For analysts from BTG Pactual, consumer confidence levels are closely correlated to the president’s approval rate—which also fell last month—while businesses reflect worse expectations for the economy.  </span></p> <h2>Don&#8217;t let yesterday fool you</h2> <p><span style="font-weight: 400;">Monday was a positive day for Brazilian assets, with the Brazilian Real gaining 1 percent against the U.S. Dollar, and the São Paulo stock market closing up 0.67 percent. The results, however, have more to do with China&#8217;s strong manufacturing results which helped allay investor concern about a slowdown in global growth. Internally, investors are still focusing on the progress the pension reform will have in Congress.</span></p> <p><span style="font-weight: 400;">The bill is stalled in the House&#8217;s Constitution and Justice Committee—which is supposed only to determine whether or not the proposal is constitutional. But party leaders are already moving to water the reform down before the real debates begin. They oppose the government&#8217;s proposal to make further changes to the pension reform possible without amending the Constitution—thus taking power away from Congress.</span></p> <p><span style="font-weight: 400;">Other changes could come from congressmen: there are calls to alter employers&#8217; participation in pension capitalization, lower the minimum retirement age for women, and reduce the minimum length of service for teachers. President Bolsonaro is set to meet later this week with leaders from centrist parties, hoping to get their support. Today, Chief of Staff Onyx Lorenzoni will meet with 15 leaders.</span></p> <p><span style="font-weight: 400;">Tomorrow, the Economy Minister is <a href="">expected</a> to talk to the committee, which could approve the constitutionality of the reform in two weeks time. Then, a special committee to debate the merits of the bill will be formed.

Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, she worked as an Editor for Trading News, the information division from the TradersClub investor community.

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