Letter to Investors – 1H25
Dear Investors,
The year 2025 brought significant structural changes to capital markets, which began to be reflected in asset prices during the first half of the year. The change in administration in the United States resulted in a new approach to foreign policy and a redefinition of bilateral relationships with several countries.
Over the past four years, we have emphasized that the underperformance of Brazilian assets stemmed from a combination of domestic and external factors. Externally, the main driver was the appreciation of the U.S. dollar against nearly all global currencies. During this semester, we witnessed the most intense dollar depreciation since 1972. We believe this shift is structural and appears to be part of a deliberate strategy by the U.S. government aimed at transitioning toward a new economic model. Although not formally announced, what has been referred to as the “Mar-a-Lago Accord” seems to be taking shape, as suggested by the actions of key policymakers.
Despite the continued and accelerating deterioration of domestic public accounts, local assets posted positive performance. In absolute terms, equities rose 15%, the Brazilian real appreciated 10%, and the long-end of the interest rate curve declined by approximately 200 basis points. From a global perspective, other Latin American and emerging markets also benefited, suggesting that the primary driver of this move was external realignment rather than purely domestic merits.
Another factor contributing to dollar weakness was the U.S. government’s decision to postpone fiscal adjustments. The approval of the so-called “Big Beautiful Bill” maintained an elevated deficit and heightened concerns regarding U.S. fiscal sustainability. The notion that American exceptionalism may be waning gains traction as these imbalances persist. The current administration’s plan combines tax reductions (implying lower revenues) with sustained elevated spending to stimulate economic growth — a strategy reminiscent of the post-World War II Marshall Plan. In this context, monetary expansion remains significant and deficits continue to be financed under the assumption that future growth will offset current imbalances. The U.S. economy remains resilient, particularly supported by strong investment in artificial intelligence (AI), with limited signs of deceleration.
Market expectations currently embed stronger growth and higher inflation ahead. This explains the Federal Reserve’s stance in maintaining policy rates at elevated levels until more consistent evidence of economic slowdown or sharper disinflation emerges. U.S. equity indices remain near historical highs, reflecting confidence in the continuation of a model supported by substantial fiscal spending and, most importantly, technological innovation driven by AI.
In Brazil, the growth model remains heavily reliant on fiscal stimulus, despite persistently low confidence among economic agents. The Selic rate reached 15% per annum — the bitter remedy of this expansionary framework. Even so, economic activity continues to be supported by multiple fiscal programs injecting liquidity into the system. To illustrate the magnitude of this stimulus, real public spending increased 9.9% over the first two years of the current administration — a pace that appears difficult to sustain over the medium term. Unemployment stands at multi-year lows and GDP growth is close to 3% per annum. However, these positive indicators have not translated into political approval: the government remains unpopular and its prospects for the 2026 election are increasingly uncertain.
This scenario bears similarities to the United States, where solid economic indicators did not prevent widespread public dissatisfaction — ultimately contributing to Donald Trump’s political resurgence. Accordingly, the main medium-term driver for Brazilian investments will be the October 2026 electoral process. Markets currently price two markedly distinct scenarios. However, continuity of the current administration would likely raise the political cost of coalition support and reduce its probability of success.
For the coming quarters, we see risks of economic deceleration due to restrictive monetary conditions. A real interest rate near 10% per annum is unsustainable, particularly in a more benign external environment characterized by a weaker dollar and declining inflation. We therefore believe Brazil is approaching the beginning of a rate-cutting cycle, which may unfold despite fragile fiscal conditions. There will likely be a “tug of war” between potential downward earnings revisions and, on the other hand, monetary relief — potentially reinforced by expectations of political change.
Brazilian assets continue to trade at significant discounts, both in absolute terms — with high implied real return expectations — and on a relative basis compared to historical levels and to other emerging markets. The favorable external backdrop, expectations of monetary easing, and discounted valuations present an opportunity with compelling positive asymmetry.
Key risks to this scenario include a potential reversal in electoral expectations, increasing the probability of policy continuity with limited fiscal discipline, as well as a deterioration in the global environment marked by slower activity and falling commodity prices. We remain attentive to the evolution of these factors, with a focus on capital preservation and on capturing opportunities that may arise in this new phase of global realignment.
Sincerely,
Moat Capital