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ECONOMY | 04-09-2019 12:40

Hedge fund veterans see Argentina as cautionary tale for Brazil

Though the Brazilian economy rebounded in the second quarter, dodging recession, economists have consistently lowered expectations amid weaker-than-expected data.

Fund managers Jose Tovar and Bruno Garcia have endured all the ups and downs Latin America has thrown at them in recent years, from populist governments to soaring inflation and countless sketchy economic plans.

This year, the founders of the Rio de Janeiro-based asset-management firm Truxt Investimentos are especially concerned about the slow pace of recovery for the region’s largest economy. And they believe the turmoil taking place in Argentina is sending a message to Brazil’s President Jair Bolsonaro: growth needs to pick up for the government’s market-friendly agenda to succeed.

“The primaries were a signal,” said Tovar, the chief executive officer at Truxt, which has 11.5 billion reais (US$2.76 billion) in assets under management. “Even with Mauricio Macri’s liberal, orthodox line, his administration wasn’t able to deliver during the electoral period and that will probably cost him the election.”

Macri’s plan to balance Argentina’s budget through economic growth never came to fruition. Instead, he had to implement painful spending cuts and the economy likely grew for only one of his four years in office. Pollsters say Macri is highly unlikely to overcome his 15-point primary loss to opposition candidate Alberto Fernández in the election on October 27.

Though the Brazilian economy rebounded in the second quarter, dodging recession, economists have consistently lowered expectations amid weaker-than-expected data. Bolsonaro’s administration has pledged to move forward with measures including overhauls of the nation’s tax and social security systems, shrink the size of the state and cut down on notoriously bad red tape.

“The pension bill came in better than expected and gave us a greater comfort that Brazil won’t go bust,” said Garcia, the firm’s chief investment officer. “But to solve the problem Brazil needs to grow. If it doesn’t, the fiscal equation isn’t solved, the unemployment rate doesn’t fall, and the political situation doesn’t improve.”

Reducing risk

The duo see mounting headwinds in the external scenario amid a lingering trade dispute between the US and China and a slowing global economy, which led the asset manager to reduce its appetite for riskier assets.

“There are strong signals of a major risk aversion,” said Garcia, citing the recent strong appreciation in gold and the US dollar.

Truxt recently scrapped a bet on Brazil short-term interest rates, which are seen already pricing in the benchmark Selic rate falling to five percent. It also closed the small optimistic position its Truxt Macro Master FIM fund had in local stocks, and is betting the US dollar will advance versus the Brazilian currency. Outside of Brazil, the firm is long gold and has a bet on Mexican rates.

Among Brazilian stocks, Truxt has favored names linked to the domestic economy, which will benefit from an eventual economic rebound. It likes some stocks in retail, electric utilities and healthcare, according to Garcia.

Tovar founded ARX Investimentos in 2001 and sold the asset-management firm to BNY Mellon seven years later. In 2017, he and Garcia left ARX to create Truxt, which currently has 40 employees.

by Vinícius Andrade, Bloomberg

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