UBS Recommends Inflation-Linked Brazil Bonds as Hedge Against US and China Headwind

Amid global volatility, UBS Wealth Management is pointing out the potential of fixed income and real estate assets in Brazil

UBS Recommends Inflation-Linked Brazil Bonds as Hedge Against US and China Headwind
August 25, 2023 | 09:54 AM

Read this story in


While the resilience of the Brazilian economy may offer some protection against lingering global headwinds, including the United States’ growing budget deficit and China’s slowdown, assets in the South American powerhouse are far from immune to such turbulence.

In such a defiant landscape, UBS Wealth Management is recommending investments in inflation-linked Brazilian government bonds (”Tesouro IPCA”+ or “NTN-B”) over traditional bonds and stocks.

In a recent report, Ronaldo Patah, Chief Investment Officer (CIO) at UBS Wealth Management in Brazil, emphasized a continuing and substantial commitment to fixed-income investments. This strategy remains appealing in what remains an environment of high-interest rates.

Argentine Candidate Milei Backtracks on Changes to Trade Relations With Brazil, China

The Brazilian unit of the Swiss bank, which recently merged with Credit Suisse’s, does not foresee a significant crisis of confidence affecting global bonds. In this context, its preference lies with assets linked to longer-duration inflation trends.


Patah, in the report, noted that “this asset class has demonstrated robust performance of late, and we still see room for further growth.”

A Neutral Stance on Brazilian Equity, for Now

Given the limited positive domestic catalysts seen in the near term and the increased sensitivity of assets to global markets, the bank is adopting a neutral stance on Brazilian equities.

According to Patah, sectors with high exposure to the domestic market should become more attractive in the coming months, as the Central Bank cuts rates further. Earlier this month, the rate was axed for the first time, moving from 13.75% to 13.25% annually.


“As consumer and business confidence gain momentum, local investors are likely to show more interest in equities, even as they face diminishing returns in fixed income,” he assessed.

Will Latin America’s Largest Economies Keep Cutting Rates? This Is What Analysts Are Saying

UBS Wealth Management sees an annual Selic rate of 8% in the third quarter of 2024, implying a substantial 5.25-percentage-point cut from the current rate. This signals an assertive easing cycle, which could provide a buffer in case of a downturn in the northern hemisphere.

Nonetheless, the prevailing sentiment is that it’s too early for investors to shift from fixed-income to equity, resulting in current stock valuations lacking “visible positive catalysts,” as noted by the economist.

The bank also expressed a preference for real estate assets, given their perceived attractiveness relative to current market prices.

Brazil’s Congress Approves Lula’s Fiscal Plan

Global Concerns

Despite the potential for a rate cut cycle in Brazil to heighten investor risk appetite, external concerns loom large. In the United States, a mounting deficit and an “artificially” constructed debt ceiling are sources of apprehension.

Patah noted, “The recent announcement of a new net offering of Treasury bonds, approximately $1 trillion in this quarter and another $850 billion in the fourth quarter, will significantly impact investor sentiment.”

Meanwhile, China’s economic data has consistently fallen short of expectations, exerting downward pressure on Chinese stocks and the yuan.


Notwithstanding this challenging global backdrop, UBS Wealth Management maintains that Brazil’s exposure to these issues remains limited. It is presumed that, in the event of further deterioration, both the US and Chinese governments possess substantial tools to address prevailing challenges.

The wealth management arm of the Swiss bank warns of heightened market volatility in the months ahead.

UBS Wealth anticipates a 2.5% growth rate for Brazil this year, contributing to an 11% cumulative expansion over the next three years until 2023.”