Citi and BCA downgrade Brazilian asset ratings after Lula's comeback

Reuters, October 27 - Citi and BCA Research downgraded Brazilian assets after Lula da Silva won the election (link), citing that the risk-reward profile for stocks, bonds, and currency has deteriorated as investors reassess the outlook for fiscal discipline and structural reforms under the new government.

This assessment reflects a broad shift in investor sentiment, with strategists warning that even with constraints imposed by a more conservative Congress, looser fiscal policy, worsening public debt, and slower progress on growth-boosting reforms could put pressure on the Brazilian markets.

Details are as follows:

• On Monday, after Lula won the election, Citi exited its bullish positions on Brazil, removed its “overweight” recommendation for Brazilian equities, and closed out long positions in the Brazilian real BRL=

• “Although prices will likely fall below fair value, the market was already bullish beforehand, which makes an overshoot to the downside possible. In light of the election result, we are closing Brazilian risk positions,” Citi stated

• On Monday, Brazilian assets plummeted, with the Brazilian real BRL= dropping over 11% against the dollar and the benchmark Bovespa index .BVSP tumbling 13.9%, marking its biggest single-day fall since March 2020

• Investors expect trades betting on a rotation in government (link) to be gradually unwound in the near term

• On Monday, BCA Research downgraded Brazil’s rating relative to emerging markets, saying Lula’s victory “ended the prospect of orthodox government that would structurally improve Brazil’s fiscal position and potential growth”

• BCA downgraded Brazilian equities from “neutral” to “underweight,” citing rising default risks, weak growth outlook, and inflationary pressures from currency depreciation

• The firm also cut Brazilian local currency bonds and sovereign credit ratings from “overweight” to “underweight,” warning that the debt situation is deteriorating

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