Brazil has so far avoided an aggressive national lockdown, but is nonetheless at the mercy of unprecedented demand destruction in developed markets and the collapse in global commodity prices. With the Bovespa losing 50% of its value in USD terms, the bad news, and potential future bad news, is either fully priced, or very close to being fully priced. According to Bloomberg’s ranking the Bovespa is the worst performing national equity index. Even with the collapse in oil prices, Russian stocks are down by just 35% in comparison.

There is, however, one lingering concern. With persistent twin deficits (around 9% of GDP) and successive cuts to the Selic rate eroding the carry buffer amid a clamour for dollars, the BRL is on shaky ground. The BCB has started to intervene in the spot and forward markets, with dollar reserves down $27bn (-7%) from the YTD peak and the FX swap book increasing by $12.5bn (+35%). However, the scale of FX intervention may need to be ramped up sharply in the absence of policy rate tightening in order to stabilise the BRL. If the BCB can achieve this, equities will be well positioned to outperform.

Source: Bloomberg, Macrobond and Variant Perception