Brazil will have a new president in January and is hoping for more stability after the turbulent years of pandemic and political polarization.

But risk remains – the new government has yet to disclose its economic agenda so an expected succession of interest rate cuts may not happen.

Nonetheless, there will be opportunities to invest in Brazil with the focus on bonds if rates remain high or equities if they fall. Either way, Brazilians are optimistic about domestic returns.

As for foreign markets, the move towards offshore investment is here to stay, even if current economic conditions are giving local investors a reason to slow down foreign allocations.

The message for vendors of international funds in Brazil is clear; highlight your funds that have consistently added alpha and beware that slips in performance are not acceptable.

What’s hot and what’s not

Last month, Citywire Brasil spoke to the country’s 15 top selectors: bank gatekeepers, new platforms, super-allocators in pension funds, big family offices and private banks. Together the institutions they represent manage some R$800bn ($148bn).

We asked them how they would allocate for the year ahead. They also had to grade their allocation choices from one to 10, according to their level of conviction in the asset class.

Domestic optimism

In dollar terms, the MSCI Brazil index is down by about 22% over the last five years while the S&P 500 – even after this year’s sharp drop – has risen by about 54%.

The attractions of home are enhanced by the worsening optics elsewhere as both Europe and the US raise interest rates and flirt with recession.

The result is investors are more willing to invest in Brazil than abroad. Their biggest bet is on multimercado funds, Brazil’s version of hedge funds, which invest in all asset classes and account for 21% of the $1.4tn local market.

‘The recent increase in risk premiums on Brazilian assets should generate good opportunities for multimercado and equity funds in the short and medium term,’ said Rodrigo Giordano, superintendent of portfolio solutions of the R$238bn Itaú fund of funds.

‘Private equity and venture capital funds can also take advantage with a long-term view’.

Looking abroad

Not that Brazilians are giving up on markets beyond their borders.

As Marcus Sena, manager of Bradesco Asset’s global fund of funds, told me: ‘The internationalisation of investments in Brazil is a path of no return. We believe that the level of local investor awareness of the importance of global diversification will make this process irreversible.’

Mauricio Hazzan, CIO at Safra Private Banking agrees: ‘We are still in the internationalisation process, despite this being a bad moment. However, we will see more and more Brazilians going abroad. Our home bias is very large and, obviously, we need to move forward’.

And these top selectors are happy that international asset management firms are moving to Brazil.

‘We’ve seen positive movement of global assets coming to Brazil,’’ says Barbara Boltje, head of funds of funds at Petros, the second biggest pension fund in Brazil, with R$ 108 billion AUM.

But the process has clearly slowed down and groups have become more cautious as investors doubt whether active global managers can outperform their benchmarks.

‘We are being tested for the efficiency of active management, which leads us to big questions,’ says Sena. ‘We believe in the value of a good manager, but perhaps the future will be a hybrid model.’

Right now both passive and overseas allocations are low. ETFs account for only 3% of the Brazilian fund markets, as do foreign markets.

Until now Brazilian active managers have been very comfortable in their ability to deliver alpha. Mulitimercados charge 20% of performance above the benchmark, the Brazilian interbank deposit rate, currently 13.75%.

To survive, these funds need to deliver at least a 15% return this year. That may sound like a high hurdle but data from Anbima (The Brazilian Financial and Capital Markets Association), shows multimercado macro funds have returned 18.6% on average over the last 12 months while long-short strategies have delivered 25.7%.