Dear Investors,
The US economy resilience and the artificial intelligence thematic were once again among the main highlights of the first quarter, sharing the spotlight with another sensitive topic: the inflation rebound in US. This has led to a global repricing of interest rates and consequently a reallocation of capital flows, adversely affecting emerging markets.
In Brazil, the quarter was marked by significant disappointment with risk assets, foreign investor exits, and continued outflows from multi-market (local hedge funds) and equity funds. Although the U.S. continues to drain global liquidity, we believe we are close to an important local flow reallocation due to tax and regulatory changes in the Brazilian fund industry, as well as tighter restrictions on tax-exempt fixed-income asset issuance.
Despite the underwhelming performance of Brazilian assets, the economy itself has continued to perform better than expected. Activity once again shows reasonable vigor, especially in areas related to income and consumption, as we discussed in the previous letter. At the beginning of the year, growth expectations for 2024 were around 1.5%, and today they are already above 2%. El Niño, which had been pointed out as the villain of this year’s agricultural harvest, should be less severe than initially estimated.
We are in a stage where we witness two antagonistic forces acting on the performance of domestic assets: on one side, the positive surprise in inflation and growth, and on the other, the increase in the cost of capital. The latter reflects a situation of global uncertainty, fears about public spending control, and noises from the government such as the episode of extraordinary dividend payments by Petrobras. Today, these factors have been predominant in price dynamics.
From the perspective of the global economic cycle, the main debate is probably understanding the reason for the remarkable resilience of the US economy. There are several hypotheses about this strength, such as the savings accumulated over the COVID years, which have not yet been fully consumed, high fiscal spending over the peacetime, immigration, and significant productivity gains with various behavioral changes after the pandemic and AI.
This year also started with a rebound in industrial activity, particularly in China, affecting the prices of metallic commodities. This prompts us to consider whether the world’s second-largest economy can sustain a more robust recovery following its prolonged post-pandemic downturn.
The market remains vigilant about how these dynamics will affect growth and, crucially, US monetary policy. While initially, six interest rate cuts were anticipated, recent forecasts have scaled this back to just two, with some experts suggesting that rates might remain unchanged through the end of the year.
The complexity of the geopolitical environment and the American elections are other crucial points to the global puzzle.
In this context, despite our frustration with the intensity of the global and local interest rate cycle, we observed a favorable dynamic for commodities in the face of greater global growth. Thus, we decided to increase exposure to global cyclical companies, which benefit from this dynamic and protect us from a potential increase in fiscal risk perception.
This change does not mean that we see few opportunities in domestic companies. Quite the contrary, we maintain significant exposure in this group. The increase of long term rates premium has led companies to trade at very high discounts at a time of improving results – a rare combination.
Finally, it´s important to highlight that many stocks returned to the prices of October last year, when we lived in a context with some similar characteristics, which is high local risk premium, pressured interest rates in the U.S., and high inflation. We believe that a small reversal of this movement could trig a strong appreciation of assets, as seen in the last two months of last year. Thus, we remain invested accordingly, understanding that revenue and profit growth will outweigh the many “noises” along the way.
Sincerely,
Moat Capital.
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Past performance does not guarantee future results. Investments in funds are not guaranteed by the administrator or by any insurance mechanism or, still, by the credit guarantee fund. For more information visit the website www.moat.com.br. The fund performances are net of fees, Standard fees are 2% management fee and 20% over the benchmark performance fee