Selic has passed the point or does it still need to go up? Managers diverge on high and have different positions in the portfolio

The hike in the basic interest rate, the Selic, to 13.25% took few (if anyone) by surprise last week. The half-percentage point increase was practically a unanimous bet among fund managers – which does not mean that they have converging opinions on the latest decisions of the Monetary Policy Committee (Copom) of the Central Bank.

While most managers show that they believe that the successive negative surprises related to inflation left Copom with no alternative, other than to continue raising interest rates, some voices begin to verbalize that the Selic has passed the point at this point in the championship.

Among those who believe that there was a “tremendous exaggeration” is Guilherme Abbud, founder and investment director of Persevera Asset Management. “For all the scars in relation to inflation in the past, Brazil always ends up exaggerating in the high cycle and using much more tax than it would need”, he says. His assessment is that the Copom could have stopped raising interest rates earlier, although it is difficult to pin down at which level.

in a vision ex-ante, taking into account expectations, Abbud says that real interest rates projected for the coming years are around 6.5% per year, “more than enough” to slow down activity and hold prices down. But given that the effects of monetary policy take a few months to appear, inflation continues to rise while the Selic bullish cycle is underway, keeping real interest rates steady. ex post (checked at the moment) very low for a while, he explains.

“There is an impression that real interest rates in Brazil are between 3% and 4% per year, and we are already at more than 6%”, he says. “But we have ghosts from the past [de hiperinflação]. The trauma is so great that, in a way, a choice is made to sin in excess.”

The risk is to lead the country to plunge into an economic recession – the managers heard by the InfoMoneyfor the most part, already forecast zero (or even negative) GDP growth in 2023.

Abbud echoes other managers, such as Rogério Xavier, from SPX Capital, for whom Brazil is unable to maintain real interest rates of 6% for an extended period, a level he considers “exaggerated”. “I don’t see the advantage of the BC continuing to raise interest rates more than they already are,” he said in a recent interview with Economic value.

(Elaborated by Leonardo Albertino/InfoMoney)

At the other end of the spectrum are economists like Daniel Weeks, a partner at Garde Asset Management. “If the Selic rise was too much, someone would have to be projecting inflation below the target. I can’t see in the market prices agents thinking it was excessive,” he says.

In his view, the Selic rise cycle was longer and more intense than initially thought because the problem turned out to be worse. “We are experiencing inflation that is largely global, which makes it more resilient,” says Weeks. The economist points out that due to inflationary memory, indexation mechanisms still remaining in the economy tend to perpetuate shocks. “Expectations worsened and the Central Bank reacted strongly. It’s a fact, and that’s why it reacted more than other central banks”.

For Weeks, although part of the market has the perception that the Central Bank applied an excessive dose of the drug, if it were chasing the inflation target with fire and fire, the Copom would need to raise the Selic even more in the next meetings. In the market, interest rates are expected to rise by 0.25 or 0.50 percentage point at the Copom meeting scheduled for early August.

The models adopted by the Central Bank, explains Weeks, estimate that each 1 percentage point increase in the Selic has the effect of reducing the IPCA by 0.30 percentage points. “The BC has a projected IPCA of 4% [para 2023] in your model, which would still require lowering inflation by 0.75 point [para chegar ao centro da meta de 3,25%]”, it says. At the tip of a pencil, this would require interest rates that are 2 to 2.5 percentage points higher than the current ones.

Model > risk balance?

It does not seem to be what the Central Bank intends to do with the Selic from now on – at least in the market’s interpretation. Both in the statement released after last week’s meeting and in the minutes, published on Tuesday (21), the monetary authority spoke of bringing inflation “to around the target in the relevant horizon”, ceasing to use the expression “center of goal”.

“It was a first official acknowledgment that it will be very difficult to hit the target next, an attempt to get people not to be extremely strict with the target center,” says Ivo Chermont, partner and chief economist at Quantitas Asset Management.

Weeks, from Garde, recalls that the inflation targeting system presupposes some flexibility, which is why variation bands are established – in 2023, for example, the target will be met if inflation stays between 1.75% and 4.75% , given the margin of 1.5 percentage points over the midpoint of 3.25%.

“If it is well communicated, there is a way to achieve a convergence of inflation that avoids a very strong recession in the economy”, he says, noting that a very high rise followed by sudden cuts would not be productive. “The BC cannot be more realistic than the king, there is no reason to generate such high volatility in activity to leave inflation at the center of the target”.

Daniela Lima, economist at Kinea Investimentos, recalls that the same models that indicate the need for interest rates beyond 15% or 16% now suggested that the Selic rate would go to zero at the height of the crisis caused by the coronavirus pandemic, which broke out in 2020. crucial is that the BC has a clear goal, and cannot be lenient. But it is up to the Copom to observe the model and also the risk balances”, she says.

For Chermont, given the imbalances resulting from the pandemic, the world is experiencing a moment of “withdrawal of excesses” that led to the inflation scenario. “This presupposes a certain tightening, and one of the channels is the reduction of economic activity”, she says. In his view, the Central Bank did not go too far with the Selic – but a legitimate discussion is the size of the inflation target it should pursue.

“There is a debate that, since inflation is a global problem, until the world does not fight excesses, the Central Bank would be trying to control the uncontrollable [ao elevar os juros]”, it says. “It’s fair, but it demands a discussion in the appropriate forum, like the CMN (National Monetary Council), which could eventually change the inflation target”.

The tax burden

Sylvio Castro, partner and CIO of Grimper Capital, says that the discussion about the size of the Selic increase so far is “far from obvious”. “It wasn’t a smooth cycle, it was a huge squeeze, but I don’t think the BC will have the courage to announce the closure until it can see expectations anchoring in the center of the goal”, he says. “And it runs a huge risk of tightening activity too much, paying the price of a more troubled fiscal situation in the medium term.”

For Castro, the fiscal issue is at the root of the problem. The proximity of the October elections and the government’s attempts to improve its image with the population, adopting measures that demand public spending in an attempt to alleviate the effects of higher prices, lead the market to a perception of a worsening in public accounts for the next few years. years old.

This is at least part of the explanation for the exchange rate to remain at high levels, according to Castro. The appreciated dollar is one of the factors that make it even more difficult to reach a balance in prices. “Historically, when commodity prices go up, our currency gets stronger too [já que o Brasil é exportador de matérias-primas], which is particularly true when interest rates are very high. The question is: why do we continue with the weak currency?”, he asks.

The dollar was quoted at R$ 5.16 on the morning of this Wednesday (22), having reached around R$ 5.70 during the first quarter. “The perception is that the fiscal issue, in the short term, is equated by the boom of commodities and inflation itself [que elevaram a arrecadação pelos governos], but this is cyclic. And because of that, it sets a price on the exchange rate and prevents inflation from falling faster”.

investment decisions

The five managers interviewed by the InfoMoney believe that the Selic high cycle can be ended at the August meeting. But not everyone is fully convinced about this, which is why the way they position their portfolios differs.

Some managers, such as Garde, have avoided taking large positions in interest rates, due to the uncertainties present in the scenario. “With the cycle approaching its end, the fixed rate curve could close [com as taxas diminuindo], but we are not isolated from the world, which is inflationary and with higher interest rates. We’re not doing much in that market,” says Weeks. On the stock exchange, the preference is for shares of exporting companies, closely linked to the commodities segment, which can benefit from the current situation.

At Kinea, most of the allocation is in international markets, according to Daniela. “We see more opportunities out there than in here. We are expecting better entry points in Brazil,” she says.

At Grimper, the current option is to keep “one foot in each canoe”, with different bets on the interest rate market, in smaller positions than usual.

“We are bought in NTN-B [título público cuja remuneração é atrelada ao IPCA]but we also maintain a position of relative value, part long in NTN-B and part taken in fixed interest [apostando na alta], still working with a scenario in which inflation rises a little more”, explains Castro. “We think that the BC may stop raising interest rates at the next meeting. But it doesn’t give the slightest hint of when the cutting cycle will start”.

At Quantitas, management has also valued relative value operations – more than market direction in general, its gains come from the behavior of one asset in relation to another. “We see two distortions in the yield curve, which still have room to continue: on the one hand, it prices a little reduction in the Selic between the end of 2023 and the beginning of 2024; on the other hand, the levels of implied inflation between 2026 and 2028 run at 7%, which seems like a lot”, explains Chermont. It is at these corners of the curve that the house’s fixed income operations are currently concentrated.

Abbud, from Persevera, sees an opportunity for investors – little by little and with discipline – to start extending the term of their investments. “Both real and nominal interest rates look way above the long-run equilibrium price,” he says. “It’s a challenge, because the yield curve has already widened in brutal movements. But it is the typical situation where we should take advantage of extending or even perpetuating the higher rates. Securing 12.5% ​​per year of profitability for ten years seems like a good opportunity”.

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