Latin America

In this report, we explore Brazil’s inflation and monetary policy outlook, the Lula administration’s back-and-forth between pragmatism and populism, and how these factors will affect Brazilian financial markets going forward. All in all, we believe Brazilian risk assets will be in a trading range relative to their EM peers in the next 12 months.

Peruvian financial markets will outperform their EM peers given the country’s clear macroeconomic and political visibility. Low and plummeting inflation, a decelerating economy and a lack of economic excesses will allow the central bank to cut rates in the coming months and achieve a soft landing. A reluctant alliance between Congress and the President will ensure political stability until 2026.

Chile’s equity market is set to sustainably outperform its EM peers on the back of political and macroeconomic tailwinds. The new moderate constitution and pragmatic government will boost market sentiment. A continued economic contraction and tumbling inflation will allow the central bank to initiate an easing cycle sooner than most EM and regional peers.

In this short weekly report, we review some of our favorite FX trades.

The new fiscal framework will fail to prevent the rise of the public debt-to-GDP ratio as it relies on overly optimistic revenue growth. A rising public debt-to-GDP ratio will lead to a widening fiscal risk premium in Brazilian financial markets. We are making two new recommendations: downgrade Brazilian sovereign credit from neutral to underweight, and go long Brazilian CDS / short Mexican CDS.