(Bloomberg) --Genoa Capital, a Brazilian hedge fund with $3.8 billion in assets under management, says it's time to bet on the nation's currency and stocks as the central bank's cautious approach to interest rate cuts diminishes the appeal of local rates.
While the Brazilian real is one of the best performing major currencies this year, trailing only the Mexican peso, it's fair price is "closer to 4.5 than 5 reais per dollar," according to Igor Velecico, a partner and chief economist at Genoa. That's about 6.8% stronger than the 4.83 per dollar the currency is trading at.
"We are bullish on Brazil and think that a conservative central bank tends to strengthen the currency," he said in an interview at the firm's headquarters in Sao Paulo.
Brazil policymakers began lowering borrowing costs back in August, one of the first major central banks to embark on easing campaigns. Despite ample pressure from markets and the government to pick up the pace of rate cuts, it's so far stuck the course, lowering the benchmark Selic rate by 50 basis points for four straight meetings and committing to the same pace going forward.
That has helped keep the currency appealing to carry traders -- in which investors borrow in currencies where interest rates are low and invest in the local assets of countries where they are high. If interest rates won't come down quickly, it assures the spread with US rates won't narrow too fast, Velecico added. He forecasts the Selic will fall to 8.5% in the fourth quarter of 2024, from the current 11.75%.
Stocks
The fund has also recently added exposures to stocks, which are at a record high on the back of falling interest rates and strong activity data at home and a broad risk-on rally globally. Genoa's main positions are in banks, healthcare, consumer staples and utilities.
Brazil's fiscal standing remains a key risk, which markets are overlooking, Velecico said. Genoa expects the government to miss fiscal targets for both 2024 and 2025, and forecasts accounts will worsen instead of improving if the government doesn't announce a new round of measures to raise revenues.
Genoa's flagship fund is up 1.2% after fees in December, outpacing the benchmark CDI overnight rate's 0.8% gain. The fund year-to-date advance of 12.3%, however, still lags the benchmark rate's 13% climb. The firm was founded in 2020 by former traders from Itau Unibanco's asset management division and has a team of 63 people.
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