Top Brazil Hedge Funds See Traders Embracing Lula’s Comeback

(Bloomberg) -- Two of Brazil's most renowned hedge fund managers see markets embracing Luiz Inacio Lula da Silva's comeback to power if he wins this year's presidential election, a result they see as practically a given.

Speaking at an event hosted by Credit Suisse Group AG on Tuesday, industry veteran Luis Stuhlberger said the leftist former president, and front-runner for the October vote, is unlikely to adopt radical policies or make sweeping changes if elected.

“Lula is the favorite. He practically already won,” said Stuhlberger, the chief executive officer and chief investment officer at Verde Asset Management SA. “I don't think we'll see a vengeful Lula, or a union-leader Lula, prevail.”

Lula, who leads all early polls, has a complicated relationship with markets. Assets soared when he was in power in the early 2000s, aided by a massive rally in commodity prices, but the shine wore off amid mistakes made by his hand-picked successor, Dilma Rousseff. In the 2018 election, investors cheered when the left-wing politician was barred from running due to bribery convictions that landed him in jail. To many, Lula became the face of Brazilian corruption, helping give rise to Jair Bolsonaro. When Lula's convictions were tossed out on procedural grounds last year, clearing him to run for office again, assets tanked.

Yet investors have also become disillusioned with Bolsonaro, who failed to push through a sweeping reform agenda and is perceived as having tarnished Brazil's reputation abroad with controversial stances on everything from climate issues to vaccines. Moreover, Bolsonaro is overseeing an economy still reeling from the impact of the coronavirus pandemic: Brazil has slid back into recession and inflation is running above 10%.

“Don't shoot the messenger: people abroad like Lula, and don't like Bolsonaro. It's a fact,” said Rogerio Xavier, co-founder at hedge fund manager SPX Capital, on the same event. “Foreign investors see a chance Brazil improves under Lula.”

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The perception, Xavier said, is already showing in market flows. Local stocks saw an inflow of 32.5 billion reais ($6.2 billion) from non-residents in January, the second-largest monthly figure since at least 2008, as investors including Franklin Templeton and Mirae Asset Global Investments LLC said they saw room for a rebound.

“Brazilian stocks were left behind, and now there's a perception of a change in power -- assuming Lula's election is well underway -- and that will bring a responsible Lula, one that will move toward the center,” Xavier said. He added that while he doesn't necessarily agree that Lula will be moderate next time around, a Workers' Party administration is unlikely to promote major structural overhauls.

Verde posted a rare annual loss in 2021, dragged down by a poorly timed bet on Brazilian stocks. Still, the fund has had a return of more than 18,600% in local currency terms since its inception in 1997 and the firm has about 50 billion reais under management.

Xavier helped found SPX Capital in 2010, and the asset manager currently manages over 43 billion reais, according to data from Brazil's capital-markets association Anbima. The fund posted its biggest jump since 2017 last year, and ranks among the country's best performers in the last three and five years, according to data compiled by Bloomberg.