A ELEIÇÃO NÃO ESTÁ NO PREÇO (E O MERCADO PODE QUEBRAR A CARA)

Episode Overview

• This episode features a candid discussion between veteran fund managers Sérgio Machado and Alfredo Menezes regarding the Brazilian political and economic landscape leading up to the 2026 elections.
• The conversation explores the risks of political polarization, the lack of dialogue between opposing sides, and the potential for fiscal deterioration under the current administration.
• Viewers will gain insight into a contrarian, bearish perspective on the Brazilian stock market (Ibovespa) versus fixed income, challenging the prevailing optimism in the market.

Key Concepts

• The pricing of political risk: Machado argues that the market has zero pricing for the 2026 election risks. While a lack of power alternation won't end the world, the extreme polarization prevents constructive dialogue and allows both sides to justify absurd actions without scrutiny.
• Fiscal sustainability concerns: Menezes highlights that despite a recent improvement in market mood (driven by external factors like the US dollar weakening), Brazil's economic fundamentals haven't changed. He points out that with real interest rates at 7.5%, the country requires 3% annual growth and a 2.5% primary surplus to stabilize debt—targets that are currently unrealistic given infrastructure constraints and government spending habits.
• The "Lulaput" theory: Menezes suggests that President Lula will only commit to fiscal responsibility or administrative reform if asset prices deteriorate significantly (market crash), forcing his hand. Without this pressure, the administration is likely to "push with the belly" (delay reforms).
• The "Small Cap" disconnect: There is a notable divergence between the performance of the main index (Ibovespa), driven by foreign investment in blue chips (Petrobras, Vale), and the struggling Small Caps sector, which relies on local investors who are currently favoring fixed income over equities.

Quotes

• At 0:04 - "Não tá no preço eleição nenhuma, zero preço... Existe ainda aquela história, tem uma coisa da alternância ou não... A única coisa que eu acho é o seguinte: não acaba o mundo dia 1º de janeiro." - explaining that the market is currently ignoring election risks, though the consequences are manageable, the uncertainty remains unpriced.
• At 2:46 - "Quando eu vejo uma dívida a 7,5%, 7,70% de juros reais rodando, o país não é solvente a longo prazo... Para estabilizar a dívida, eu vou precisar crescer praticamente 3% todo ano e um primário superávit de 2,5%." - detailing the mathematical impossibility of Brazil's current fiscal path without significant changes to growth or spending.
• At 9:15 - "O potencial da bolsa tá meio limitado. Até porque o juros reais nosso é muito alto e na hora que você faz o valuation das empresas pra valor presente, isso pesa na conta." - clarifying why the stock market upside is capped; high real interest rates depress present value calculations for companies, making fixed income a formidable competitor.

Takeaways

• Evaluate the true potential of Brazilian equities by stripping away the impact of blue-chip stocks; if your portfolio is heavy on domestic-focused companies (Small Caps), recognize they are underperforming due to the high attractiveness of fixed income for local investors.
• Monitor the correlation between asset prices and government action; understand that significant fiscal reform is unlikely to happen proactively, but rather reactively in response to market stress.
• Reassess the risk-reward ratio of holding equities versus fixed income when real interest rates are hovering around 7.5%, as this high "risk-free" hurdle rate significantly limits the comparative upside of the stock market.