Investors Bet on Revival of the Brazilian Real: Market Espresso

Money managers are taking advantage of discounted prices to take on more Brazil risk before the country’s assets are hit by volatility tied to next year’s presidential elections. Their top pick? The battered real.

A visitor takes a photograph of an electronic board displaying stock activity at the Brasil Bolsa Balcao (B3) stock exchange in Sao Paulo, Brazil, on Monday, Nov. 8, 2021.
By Josue Leonel
December 07, 2021 | 07:04 AM

Bloomberg — Money managers are taking advantage of discounted prices to take on more Brazil risk before the country’s assets are hit by volatility tied to next year’s presidential elections. Their top pick? The battered real.

The currency, which is set for a fifth straight year of losses, is seen as benefiting from higher interest rates, with the Selic expected to reach double-digits early in 2022 as the central bank struggles against inflation.

In the coming months, the main driver will be the upcoming elections -- specifically, a more moderate candidate that can break the left-right polarization of former president Luiz Inacio Lula da Silva and incumbent Jair Bolsonaro. The viability of such a ticket, dubbed “third-way,” will move assets in 2022.

“We will be starting the elections period with high risk premium, a very high Selic rate and already expecting the worst case scenario, which would be Bolsonaro against Lula,” said Gustavo Pessoa, founder and partner at Legacy Capital. “It’s time for a more optimistic bet in Brazil.”


Money managers are also stock picking, looking for names attractive enough to face the adverse macro environment and the migration to fixed income assets.

“Depending on the feasibility of the ‘third-way,’ the basket that Brazil offers is very attractive,” said Tatiana Pinheiro, chief economist at Panamby Capital.

That’s the view shared by the guests of the latest edition of “Market Espresso” in 2021, where fund managers discuss the main drivers for local markets. Present at the still-virtual meeting:

  • Gustavo Pessoa, founder and partner at Legacy Capital
  • Ricardo Cara, hedge fund head at EQI Asset
  • Tatiana Pinheiro, chief economist at Panamby Capital

Real revival

The Brazilian currency is back to fund managers’ bets, after losing almost a third of its value since the beginning of the current administration. The preference is to buy the real against other emerging currencies, amid the volatility that tends to continue with the 2022 elections.

“With Brazil getting cheaper, we like the real against our peers,” Pessoa said.

The real already has a “very interesting carry” as the Selic rises, but the currency tends to be the escape valve in case of election volatility, said Ricardo Cara, the hedge fund head at EQI Asset. He prefers to place bets on real via the options market as the environment is still not risk-free, he said.

Hawkish Central Bank

Brazil’s central bank will likely deliver another 150 basis point rate increase on Wednesday and keep a more hawkish tone against inflation, according to Legacy and Panamby.


The Fed “threw in the towel” by saying it no longer considers inflation as temporary, which will make other central banks, including Brazil’s, more cautious, said Pessoa, who forecasts a 12% Selic at the end of the monetary tightening cycle. The benchmark rate is currently at 7.75%, up from a record 2% earlier this year.

Cara says the central bank may leave the door open and not signal a new increase of the same magnitude for its February meeting amid signs inflation at home and abroad is peaking. Pinheiro disagrees: there are still many uncertainties about inflation and fiscal policy in 2022 and it is not time for policy makers to signal a change in pace, according to her.

“The central bank will have to compensate the fiscal loosening,” she said. The approval of the so-called precatorios bill put an end to a long period of political noise, but left scars in Brazil’s limits to public spending, which worsens the perception of neutral interest rate, she said, adding that her forecast is for the Selic to reach 11% in March.



Investors expect local assets to rally if Sergio Moro, who led the Carwash corruption probe and served as Bolsonaro’s justice minister, becomes a viable alternative. They say he would need to reach between 15% and 20% of voting intentions in the coming months, a scenario seen as likely -- a recent Atlas poll showed him at 13.7%. Surveys showing the ex-judge climbing further would spark market gains, according to Pessoa and Cara.

“If Moro goes above 20% it will be clear that he will surpass Bolsonaro. Every time he goes up, the market will get better,” said Pessoa.

The market has no preference for a specific third-way candidate, Pinheiro added, but Moro is currently the name in the spotlight and, if he reaches 20% in polls, his performance will be monitored “with a magnifying glass.”

Stock picking

Legacy closed its short position and is now long in stocks, selectively buying to pick names that will withstand higher rates, high inflation and a recession. The fund is shunning consumer stocks and owns state-run companies like Petrobras and Banco do Brasil.


EQI is also building a portfolio of discounted companies.

“We’re starting to test the waters calmly, you can’t go with your guard down,” said Cara.


  • Legacy Capital: real against EM currencies, Brazilian stocks and bonds, long short-term NTN-Bs, paying U.S. yields
  • EQI Asset: real, receiving rates, stocks, Canadian dollar, Chilean peso, paying U.S. yields
  • Panamby Capital: real against EM currencies, stocks