{"id":5663,"date":"2023-10-02T13:26:05","date_gmt":"2023-10-02T16:26:05","guid":{"rendered":"https:\/\/artica.capital\/asset-cartas\/o-brasil-um-ano-apos-as-eleicoes\/"},"modified":"2026-05-20T15:04:47","modified_gmt":"2026-05-20T18:04:47","slug":"o-brasil-um-ano-apos-as-eleicoes","status":"publish","type":"cartas","link":"https:\/\/artica.capital\/en\/asset-cartas\/o-brasil-um-ano-apos-as-eleicoes\/","title":{"rendered":"Brazil one year after the elections"},"content":{"rendered":"<div class=\"wp-block-group has-global-padding is-layout-constrained wp-container-core-group-is-layout-eb5bab19 wp-block-group-is-layout-constrained\">\n<div class=\"wp-block-columns artica-content-spaces artica-card-container is-layout-flex wp-container-core-columns-is-layout-28f84493 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column artica-side-content is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:365px\">\n<div class=\"wp-block-group artica-carta-toc has-pureza-background-color has-background has-global-padding is-layout-constrained wp-container-core-group-is-layout-09e94731 wp-block-group-is-layout-constrained\" style=\"margin-bottom:0;padding-top:24px;padding-right:24px;padding-bottom:24px;padding-left:24px\">\n<div class=\"wp-block-group has-global-padding is-layout-constrained wp-block-group-is-layout-constrained\">\n<div class=\"wp-block-group has-global-padding is-layout-constrained wp-block-group-is-layout-constrained\">\n<nav class=\"wp-block-pycblocks-table-of-contents-pyc artica-toc artica-carta-toc has-rocha-color has-text-color has-link-color wp-elements-e563c092d58abd12d78501592d111630\"><ol><li><span class=\"wp-block-table-of-contents__entry\">Brazil one year after the elections<\/span><\/li><li><span class=\"wp-block-table-of-contents__entry\">Fiscal Responsibility on a Knife's Edge<\/span><\/li><li><span class=\"wp-block-table-of-contents__entry\">Dispute against BACEN<\/span><\/li><li><span class=\"wp-block-table-of-contents__entry\">Expanded Intervention in State-Owned Enterprises<\/span><\/li><li><span class=\"wp-block-table-of-contents__entry\">The Brazilian Stock Market and the Global Landscape<\/span><\/li><li><span class=\"wp-block-table-of-contents__entry\">Price vs. Intrinsic Value<\/span><\/li><li><span class=\"wp-block-table-of-contents__entry\">Investing Is a Slow Activity<\/span><\/li><\/ol><\/nav>\n<\/div>\n<\/div>\n\n\n\n\n<div style=\"font-size:12px; padding-right:40px;padding-left:40px;\" class=\"wp-block-pycblocks-read-time-pyc\">\n      12&nbsp; min de leitura<\/div>\n<\/div>\n<\/div>\n\n\n\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:70px\"><\/div>\n\n\n\n<div class=\"wp-block-column artica-carta-text is-layout-flow wp-block-column-is-layout-flow\">\n<h2 class=\"wp-block-heading has-noite-color has-text-color has-link-color wp-elements-3a1171d015e4aa4cd5562e4b2dceca22\">Brazil one year after the elections<\/h2>\n\n\n\n<p>Dear investors,<\/p>\n\n\n\n<p>In October of last year, we wrote <a href=\"https:\/\/articainvest.com.br\/cartas\/como-ficara-o-brasil-com-lula\/\" target=\"_blank\" rel=\"noopener\">our vision on how the Lula government would act in the new term\nour view on how the Lula administration would act in its new term<\/a>. The passage below reflects our expectations at the time:<\/p>\n\n\n\n<p>\u201c(...) The greatest risk is that Lula eliminates the spending cap and returns to policies of economic intervention, as he advocated during his campaign, but we believe that the composition of the new National Congress and the alliances formed to win the election would act as meaningful brakes on policies in that direction. If not preventing them entirely, they should at least delay them and make them more moderate.<\/p>\n\n\n\n<p>Furthermore, with a center-right National Congress and a left-wing president, negotiations tend to be slower and more contentious, hampering the Executive\u2019s ability to act in general. It is therefore to be expected that Lula would adopt a more centrist stance.\u201d<\/p>\n\n\n\n<p>The forecast has proven reasonably accurate, up to this point, and stems from a broader view we hold about the Brazilian political environment: our legislative structure is so complex and our party coalitions so fragmented that it is difficult to bring about meaningful transformations in the country within a few years, for better or for worse. (We elaborated further on this point <a href=\"https:\/\/articainvest.com.br\/cartas\/eleicoes-2022-lula-ou-bolsonaro\/\" target=\"_blank\" rel=\"noopener\">in our September 2022 letter<\/a>).<\/p>\n\n\n\n<p>Despite this, public debate remains heated, divided between opposing narratives. On one side, there are those who believe the country will be saved by more intensive government action in social programs, while on the other side are those who believe we will collapse due to fiscal irresponsibility and poor public management. Our view is more bland: we believe it is more likely that the country will continue following its historical average \u2014 certainly mediocre, but far from catastrophic.<\/p>\n\n\n\n<p>Despite this uninspiring outlook, we note that achieving good returns from stock market investing depends more on asymmetries between price and the real value of stocks than on an exuberant economic environment. Our average historical return has been around 30% per year over the past 10 years, despite the fact that it was a period in which the Brazilian economy was not particularly successful.<\/p>\n\n\n\n<p>With that, let us turn to our impressions of the first quarters of the Lula administration and our outlook for the coming years.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Fiscal Responsibility on a Knife's Edge<\/h2>\n\n\n\n<p>Even before the inauguration of the new government, turbulence arose around statements about eliminating the spending cap and increasing public investment and expenditure, without detailing the sources of funding to implement such plans. Added to the fact that it is part of the ideology of left-wing governments to work toward a larger, more active state, the statements triggered significant concern in financial markets that this line of action would generate fiscal deficits in an already indebted country, potentially sending the Brazilian economy into a vicious cycle of rising inflation, higher interest rates, and growing public debt. As a consequence, the first months after the election results were marked by widespread pessimism.<\/p>\n\n\n\n<p>In August of this year, the spending cap was in fact eliminated and replaced by the new fiscal framework. While the spending cap rule stipulated that public expenditures could not grow in real terms (the budget would be adjusted only for inflation), the new framework adopted the logic that, if the country's economy is growing, it is sufficient for public spending to grow at a slower pace for the government to achieve positive results and be able to reduce its indebtedness over time. Accordingly, a rule was implemented whereby the real growth of expenditures would be equivalent to 70% of the real growth in the government's primary revenue. However, a band was established with predefined limits for maximum (2.5% per year) and minimum (0.6% per year) expenditure growth. This implies that, even in a year of economic stagnation, government spending would still grow, thereby aggravating the fiscal deficit challenge. In other words, the success of this new system is contingent on the growth of the Brazilian economy.<\/p>\n\n\n\n<p>Despite this structural flaw, the framework came out better than much of the market expected and was accompanied by targets for generating a positive fiscal result over the coming years. The government has reinforced its commitment to such targets, and the finance minister has gained some credibility in the market through his efforts in pursuit of greater fiscal responsibility. As a result, the general mood shifted from pessimistic to skeptical. Although the risk of a fiscal deficit remains, the probability of a scenario of runaway spending by a government that neglects the issue now appears more remote.<\/p>\n\n\n\n<p>However, the problem is quite complex. It is not simply a matter of determining whether the fiscal result will be a deficit or a surplus, but also of how those results will be achieved. The most obvious approach would be to reduce government spending until it matches revenue capacity, but austerity is always an unpopular course of action and is unlikely to be adopted by a government that, in addition to having the opposite political inclination, needs to build more popular support and political allies to govern effectively. Thus, the strategy being pursued has been to seek additional revenues for the state by every means within the Executive's reach, flirting with the limits of what is technically plausible to argue. In this context, tension around fiscal responsibility is expected to persist throughout the Lula administration.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Dispute against BACEN<\/h2>\n\n\n\n<p>In the context of the fiscal surplus target and a framework that requires economic growth to remain functional, the Lula government launched numerous criticisms of the Central Bank and its president, Roberto Campos Neto, attributing Brazil's economic difficulties to its high-interest-rate policy. The logic behind this criticism is straightforward: high interest rates hinder economic growth and increase the government's spending on the financial charges of the public debt. Cutting interest rates would therefore be the easiest path to helping the Brazilian economy. However, this solution, like many other simplistic solutions, fails to consider other factors interconnected with the problem and the possible unintended consequences that may arise from the same action.<\/p>\n\n\n\n<p>BACEN raised interest rates to combat the inflation that emerged after the pandemic and, much like a doctor who prescribes that a course of antibiotics be completed even after symptoms disappear, decided to keep interest rates elevated for longer out of concern that a premature reduction would allow inflation to return. Since monetary policy is not a deterministic science, much room opened up for debate about the need to maintain high rates for so long. The government politically pressured the BACEN for months, going so far as to question the merit of keeping it independent from the Executive, but found no legislative support to impose its will on the institution. As a result, the monetary tightening plan was maintained until August, when the first rate cut was announced along with the intention to carry out progressive and steady cuts, contingent on the government maintaining its commitment to fiscal responsibility.<\/p>\n\n\n\n<p>Despite the agitation around this subject and the perception that the current government's commitment to fiscal responsibility may be more the result of a lack of alternatives than of deep conviction, this clash clearly highlights how, in today's environment, no Brazilian president has the power to implement decisions without broad support from political allies. As a result, several concerns that circulated in the press during the first quarters of the year did not materialize. We will likely still go through a long period filled with political noise and, as long-term investors should, we will remain skeptical about the materialization of extreme government measures.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Expanded Intervention in State-Owned Enterprises<\/h2>\n\n\n\n<p>The Executive branch is not so constrained in all areas of its operation. In some areas, its decisions are made without depending on other bodies, and in these cases we see a greater risk of immoderate actions. This is the case with interventions in state-owned enterprises or companies in which the government holds a significant stake, directly or indirectly. In such situations, the government votes as a shareholder, appoints executives, and decides on the adoption of specific plans.<\/p>\n\n\n\n<p>New executives and board members have already been appointed to Petrobras, Caixa Econ\u00f4mica Federal, Previ, Banco do Brasil, and various other lesser-known entities that have not received as much media attention. Several of these appointments were clearly political, involving individuals whose professional backgrounds were quite disconnected from the responsibilities of the positions they assumed. This topic always brings people's political opinions to the surface, but what matters to us is interpreting the practical effect of these actions.<\/p>\n\n\n\n<p>Executives and board members are generally chosen based on the expectation of their positive contributions to the company's business. The practice of selecting people with industry experience is based on the premise that past success in a given area is a far better predictor of future success in the same area than other possible criteria. We therefore interpret that the government's main objective, in appointing people with professional backgrounds entirely different from what the position demands, is certainly not to seek what is best for the company. Two alternatives remain: those appointed were chosen for their loyalty to whoever nominated them, in order to take measures that serve the government's interests and may differ from the interests of other shareholders; or the position was granted as a political quid pro quo for some contribution in another domain. Both hypotheses are bad for anyone who is a partner of the government in these companies.<\/p>\n\n\n\n<p>Given this track record, both of recent interventions and those carried out during previous left-wing governments, we will continue to require a higher level of return to invest in companies under state influence, since the impacts of such interventions are very difficult to predict and therefore require an additional margin of safety.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">The Brazilian Stock Market and the Global Landscape<\/h2>\n\n\n\n<p>The issue of state intervention is more particular to Brazil, but the problems of fiscal responsibility and disputes with central banks over monetary tightening policies affect several countries today. The root of the problem was the way world governments chose to act in the context of the pandemic: health measures severely impacted productivity, governments distributed freshly printed money to keep the population afloat during the pandemic, inflation came as a side effect of both factors, and as a consequence, several central banks raised interest rates to fight inflation, causing a global economic slowdown that persists to this day.<\/p>\n\n\n\n<p>In relative terms, Brazil does not appear to be in poor shape to us. We began raising interest rates roughly one year ahead of developed countries and, as a consequence, have already started the rate-cutting cycle while those countries are still finishing their rate-hiking cycle. This means we are closer to resuming economic growth, which would make our country an attractive destination for international investment during the window in which other countries have not yet entered the economic recovery phase. However, in the very short term the effect may be the reverse.<\/p>\n\n\n\n<p>For now, our economy continues to face challenges because the start of the rate-cutting cycle is still very recent and has not yet had an impact on company results. Additionally, fixed income investments in developed countries are becoming more attractive due to rising interest rates in those markets. As a result, we have observed a reallocation of some of the capital invested in the Brazilian market toward international assets. This outflow of capital from the stock market has driven prices lower and has kept a considerable share of investors with a pessimistic outlook. However, we see things differently.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Price vs. Intrinsic Value<\/h2>\n\n\n\n<p>Capital movements driven by the attractiveness of, for example, US Treasury bonds tend not to produce lasting effects, since interest rates will remain at this atypically high level only temporarily. Furthermore, changes in international interest rates are not a predominant factor in earnings estimates for most Brazilian companies. As a result, we have a situation in which the share prices of many companies have been moving due to temporary shifts between asset classes, out of step with the variation in the intrinsic value of the listed companies, which is determined by their long-term cash generation.<\/p>\n\n\n\n<p>It is worth noting that the calculation of intrinsic value depends on various subjective assumptions adopted by each investor, so there is a wide range of opinions about what the most appropriate intrinsic value is for each company. In theory, the price represents the equilibrium point between the intrinsic value views of the entire market, composed of countless competent analysts, but this broad and abstract conception proves imperfect when examined more closely. An example will help illustrate this point.<\/p>\n\n\n\n<p>Imagine that a large institutional investor has R$500 billion under management and decides to invest 2% of its total portfolio (R$10 billion) in Brazil. Since the investment represents a very small portion of its total assets, this investor decides not to conduct in-depth analysis of Brazilian companies directly and chooses a Brazilian fund manager to allocate this capital across companies listed on the B3. Some time later, this investor decides to reduce its exposure to Brazil to 1% and redeems R$5 billion from the Brazilian fund it had invested in. As a result, the manager is forced to sell R$5 billion worth of shares on the B3, regardless of its view on the intrinsic value and price of the shares in its portfolio, contributing to a decline in the prices of those shares. Even if there are investors interested in buying those shares after the decline, they may not have sufficient capital to fully offset the effect of the capital outflow. In other words, it is possible that smaller investors have a deeper knowledge of a company whose shares are being traded and, even if they believe the intrinsic value of the shares is significantly higher than the post-decline price, the decision of a large investor \u2014 who may not even know the name of that specific share in its portfolio \u2014 will push the equilibrium price downward.<\/p>\n\n\n\n<p>This example resembles the reality of the Brazilian stock market, which is a smaller equity market globally, with approximately half of invested capital coming from foreign investors. For many of these investors, Brazil is not the focus of their analysis, and it is therefore understandable that some decisions are made with less depth. What matters is that we recognize this configuration and avoid the assumption that stock market prices reflect an omniscient assessment of the intrinsic value of each company.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Investing Is a Slow Activity<\/h2>\n\n\n\n<p>Asymmetries between value and price are the source of investment opportunities, since sooner or later the price converges to something close to intrinsic value and delivers good returns to those who bought shares at low prices. However, it is necessary to understand that within \u201csooner or later\u201d lies the possibility of \u201clater.\u201d These asymmetries can persist for years on end. Patience is therefore required, along with the understanding that prices may take time to converge even in correct investment theses. In our July 2023 letter, we described some of our theses that took years to prove correct, but ultimately proved quite profitable.<\/p>\n\n\n\n<p>Another relevant point is that the existence of these asymmetries does not depend on a favorable general economic environment. On the contrary, they tend to appear precisely when market sentiment is pessimistic. The strategy of investing in equities when conditions are good is therefore not necessarily the best one. Just as it is more advantageous to buy a car with a broken headlight at half the price than to wait for the repair and pay full value, it is also more sensible to invest in stocks at reduced prices during periods of pessimism than to wait for conditions to improve, since shares will become more expensive and the asymmetries between intrinsic value and market price may shrink or even disappear.<\/p>\n\n\n\n<p>Finally, it is important to keep one's own mood as close to neutral as possible, regardless of the tone of newspaper headlines \u2014 especially since political turbulence, fragile public finances, and questionable government measures are part of Brazil's normal landscape. Throughout our career investing in the stock market, we have experienced few periods of optimism about the Brazilian economy, and yet we have still achieved excellent returns.<\/p>\n\n\n\n<p>We confess that waiting for conditions to improve and for a new price upswing cycle to begin can be tedious, but we invest in pursuit of returns, not entertainment.<\/p>\n\n\n\n<p><em>\u201cInvesting should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.\u201d <\/em><strong> \u2013 Paul Samuelson<\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>In this month's letter, we present our impressions of the first quarters of Lula's government and our perspectives for the coming years.<\/p>","protected":false},"author":1,"featured_media":5662,"template":"","meta":[],"class_list":["post-5663","cartas","type-cartas","status-publish","has-post-thumbnail","hentry"],"_links":{"self":[{"href":"https:\/\/artica.capital\/en\/wp-json\/wp\/v2\/cartas\/5663","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/artica.capital\/en\/wp-json\/wp\/v2\/cartas"}],"about":[{"href":"https:\/\/artica.capital\/en\/wp-json\/wp\/v2\/types\/cartas"}],"author":[{"embeddable":true,"href":"https:\/\/artica.capital\/en\/wp-json\/wp\/v2\/users\/1"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/artica.capital\/en\/wp-json\/wp\/v2\/media\/5662"}],"wp:attachment":[{"href":"https:\/\/artica.capital\/en\/wp-json\/wp\/v2\/media?parent=5663"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}