Real eyes comeback on solid fundamentals and high carry
Thiago Carlos
Ana Paula Paiva/Valor
Major foreign asset managers see scope for the Brazilian real to regain its early-year momentum, contingent on the election outcome and the future path of economic policy. Several international fund houses interviewed by Valor express optimism about the currency, pointing to elevated local yields, solid balance-of-payments buffers, and tailwinds from commodities—particularly crude oil.
Global public finances in developed markets are deteriorating, which gives Brazil a relative advantage. The country does not need perfection to outperform; avoiding fiscal missteps is enough, according to Thiago Carlos, an emerging markets portfolio manager at Pimco.
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Carlos notes that Pimco maintains a constructive view on the real despite election noise. Brazil’s rising oil production acts as a primary GDP driver while global crude prices remain supported by geopolitical tensions.
Carlos emphasizes that Brazil is well-positioned as multinational corporations seek geographic supply chain diversification, driving both portfolio flows and foreign direct investment (FDI). The country’s abundance of critical minerals, energy resources, and agricultural output provides a natural buffer, grounding the currency in external fundamentals rather than domestic political headlines.
Chris Kushlis
Reprodução/YouTube/T.RowePrice
Carry trade
Widening interest rate differentials continue to support the currency. Even with potential monetary tightening by the Federal Reserve, the real’s high carry keeps institutional investors interested. Chris Kushlis, chief emerging markets strategist at T. Rowe Price, highlights that Brazil offers the second-highest yield among major emerging markets.
Kushlis notes that broader U.S. dollar dynamics remain the key backdrop factor, keeping the greenback in a range-bound channel. Domestic political risks appear manageable: President Luiz Inácio Lula da Silva (Workers’ Party, PT) is finishing his third term, while candidate Flávio Bolsonaro (Liberal Party, PL) promises fiscal consolidation that would likely reassure markets. T. Rowe Price maintains long real positions as part of a broader emerging market currency basket funded by a mix of developed and developing market currencies.
Invesco also holds long positions in the real against a currency basket that includes the dollar and the euro. Wim Vandenhoeck, co-head of emerging market debt at Invesco, expects election-related volatility to pick up. However, he emphasizes that the high carry yield, paired with macroeconomic fundamentals, should cap any severe depreciation.
Vandenhoeck notes that investors scaled back long positions during the recent risk-off episode. He expects positions to trim further if polling points to a tight contest, leaving the currency sensitive to headline risks in the final stretch.
Fiscal hesitation
Caution persists among select asset managers. Manulife has chosen to avoid real exposure due to lingering uncertainty surrounding the election outcome and subsequent fiscal adjustments. Elina Theodorakopoulou, a senior portfolio manager at Manulife, warns that while high yields make the real attractive, surging local risk and volatility erode risk-adjusted returns. Fiscal trajectory remains the elephant in the room for hesitant investors.
Conversely, Eurizon portfolio manager Joana Freire argues that foreign investors will remain tolerant of Brazil’s structural issues as long as global risk sentiment stays favorable and the dollar weakens. Current asset prices make local markets compelling.
Freire points out that if the market perceives Brazil’s fiscal path as anchored—whether by a conservative administration or a reformist Workers’ Party leadership—local assets and the currency will look underpriced. While Brazil fits the classic high-yield emerging market profile, its deep, sophisticated domestic capital markets and ample domestic savings set it apart from peers.
Positioning dynamics
Union Investment maintains a constructive bias, noting that market positioning in the real has lightened ahead of the vote. Portfolio manager René Lichtschlag observes that while the carry trade remains crowded, it is less concentrated than a month ago. Investors continue to seek attractive yields that lack heavy exposure to high energy import costs.
Lichtschlag adds that compared to high-carry regional peers like the Colombian peso, the real is better insulated from El Niño weather shocks. While agricultural disruptions could fuel inflation and keep interest rates higher for longer, global risk aversion remains the primary threat to currency stability. Union Investment holds an overweight position in the real, split evenly against the dollar and the euro, and intends to maintain its exposure based on current polling data.
Eric Fine
Reprodução/YouTube/NYSE
Valuation disconnect
After leading global currency performance earlier in the year and earning praise at the International Monetary Fund (IMF) spring meetings, the real has fluctuated below its late-2024 low of 6.30 per dollar.
VanEck, which previously held an underweight position on the real, has shifted to a neutral stance. Portfolio manager Eric Fine notes that the currency appears cheap, with asset prices heavily discounting a potential Lula victory.
Fine stresses that Brazil’s strong balance of payments and external buffers set it apart from other emerging markets. While fiscal concerns exist, Brazil’s core macroeconomic problem remains singular and solvable.
