SPX Capital October 2016 Letter To Investors

SPX Capital letter to investors for the month ended October 31, 2016. From Portuguese using Google translation.

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Dear investors,

World

The main highlight of the last month was the US electoral process, which resulted in a surprising victory of the Republican party candidate Donald Trump, as well as the conquest of the Republican majority in both legislative houses.

More than a discussion of proposals by the candidates, the election brought up a discussion of the current policy. Low-skilled workers in developed countries were the big losers in the globalization process as they began to compete with the cheaper labor of Asians and Latin Americans. It is possible to see this effect when we observe the average real income in the United States, which has been stagnating since the 90’s. This stagnation of the standard of living of the population generated a permanent hostility against the political class and against globalization. Thus, the main demand of this group is the increase of protectionism.

Meanwhile, US economic indicators continue to signal a recovery, with stronger data on employment, income, and accelerating inflation. These conditions favor the perception that the Fed should raise interest rates in December, resuming the upward cycle.

In the East, China has maintained the stability of its growth, reducing, at the moment, the fear of a major obstacle to GDP growth ahead. Government stimulus has had an effect on the economy and the market, explaining the strong commodity rally so far, which has helped to reverse a chronic picture of producer price deflation (PPI) that has dragged on for several quarters.

In Europe, the evolution of Brexit is going through a critical stage, as the Supreme Court has demanded that Parliament vote on the decision to leave the European Union, which should delay the process, leading the pound to gain strength.

SPX Capital – Brazil

The reform agenda shows strength and the referral of PEC 241 to Congress has demonstrated the strength of the new government. In addition, the result of the municipal elections reinforces the loss of power of the PT in Brazil, taking the PSDB to the position of greatest winner since 2000, ruling 25% of the Brazilian population. The most relevant risk factor remains Lava Jato Operation and its ramifications.

On the economic front, consumption disappoints due to the weakness of the labor market. The currency most appreciated does not help exports, so the recovery of activity can only come from the recomposition of stocks or investments. The problem is that with interest at the current level, the investment should not react. Weaker data on activity are evidence that monetary policy remains tight.

In this sense, the Central Bank started the cycle of falling interest rates, making a reduction of 0.25 pp. Recent inflation data, benefited both by the reversal of the food shock and by the high idle capacity in the economy, should lead to a Central Bank to intensify the rate of decline of the Selic to stimulate the economy.

The following are our main allocations.

Interest

We increased our nominal interest rate allocation in Brazil. In international interest, we maintained the allocation taken in the middle part of the curve of the United States and in slopes of the long parts in the curves of some developed countries.

Coins

We continue to buy the US dollar against a basket of currencies.

The outcome of the US electoral process has changed the dynamics of global markets, necessitating sectoral reallocation. On the international side, we started a directional position slightly sold in emerging markets and bought in global commodity companies. We zeroed in our allocations from Mexican companies after the good results and the risk of a negative result in the American elections. We maintained long positions in companies in the utilities sector in Argentina, where we remain optimistic about the regulatory process in the electric power sector.

With respect to the Brazilian stock market, the index has reached its highest level since 2009. We took advantage of the good performance of the month to reduce our directional exposure, as well as zeroing the allocation in state-owned companies, which already seem to price much of the recent improvement. We have maintained our long positions in utilities and financial services.

Commodities

We continue to buy them in zinc.

After the recent rise in prices, we resumed the copper sold position and closed the long position in nickel. In spite of the acceleration of the Chinese economy and its beneficial effect on the consumption of commodities, we consider that the copper market will remain in excess of supply next year. The current price level does not seem compatible with the projected abundance framework.