(Bloomberg) -- Ibiuna Investimentos, one of Brazil’s largest independent hedge fund managers, is staying “defensive and cautious” when it comes to positioning ahead of Brazil’s general elections in October.
The Sao Paulo-based firm, founded in 2010 by two former central bank directors, is keeping a reduced exposure to local assets on persistent uncertainty over the future of Brazil’s economic and fiscal policies beyond this year. Neither former President Luiz Inacio Lula da Silva, who leads polls, or incumbent Jair Bolsonaro are likely to say much about their plans before the October vote, according to founding partner Rodrigo Azevedo.
“There’s just no visibility for a big Brazil bet at this moment,” said Azevedo, who served as director of monetary policy at Brazil’s central bank between 2004 and 2007 and now helps oversee over 30 billion reais ($5.7 billion) in assets at Ibiuna. “Things may get turbulent, and there are lots of opportunities worldwide.”
While prices look attractive -- stocks are trading at the cheapest since 2008 and the local swap rate curve implies the key Selic rate will remain above 12% for the next 12 months -- there’s a lot of caution due to the fiscal outlook and political volatility.
Lula, who holds a wide lead over Bolsonaro in voter surveys, has yet to give details of his economic plans. While he’s been calling for more spending and a review of market-friendly reforms approved in recent years, his aides say he’ll be fiscally responsible.
Bankers Cringe at Both Choices in Brazil’s October Election
Bolsonaro’s recent spending drive, meanwhile, has raised doubts on whether economic czar Paulo Guedes’s austerity agenda would prevail in a second term. Brazil’s swap rates jumped on Friday as the government unveiled plans to spend about 34.8 billion reais to mitigate the impact of high fuel prices. The aid will bypass the country’s spending cap rule, which limits the growth of public expenditures as is seen by investors as the nation’s main fiscal anchor.
The doubts have pushed Brazil’s bond risk as measured by five-year credit default swaps to the highest in about two years.
“There’s so much risk premium in Brazil that it offers us a chance of surfing the potential rally at a later stage,” said Mario Toros, who succeeded Azevedo at the central bank and later helped found Ibiuna. “There’s no rush in taking that risk.”
The firm turned instead to wagers on surging rates in countries from Mexico to the Czech Republic, Poland and Germany on the view that policy makers would need to rush to tame inflation. It paid off: the fund was among those that cashed in big by getting ahead of the surge in US bond yields this year.
While the US bet has been trimmed, the global trade still has room to run, according to Azevedo. Positions are now concentrated in developed economies, he said, adding that the next big debate will be when it’s time to start cutting rates.
“There’s a high chance that we’re receiving rates next year, but we need to navigate these next six months -- and we’ll be data dependent,” he said.
Ibiuna, which has a team of about 60 people, recently hired former Verde Asset Management and O3 Capital portfolio manager Noman Khan for its macro strategy. The firm’s flagship hedge fund climbed 25% in the past year, more than triple the return of a basket of local peers.
“The election makes the whole scenario much more complex, and both the winner and his proposals are big unknowns,” said Azevedo. “At some point, we’ll find out to where they are leaning. Until then, we wait.”
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