Investors fret over Lula’s approach to Brazil’s state-controlled companies

Shares in several major Brazilian state-controlled companies, including Petrobras and Banco do Brasil, endured a volatile week as investors fear Luiz Inácio Lula da Silva’s new government will take a more interventionist approach.

Petrobras, Latin America’s largest energy company, once fell more than 10 percent on the Sao Paulo stock exchange after Lula used one of his first decrees as president to end plans to privatize the $60 billion oil and gas producer.

The move follows Lula’s appointment of Jean Paul Prates, a Labor Party senator, as Petrobras’ next chief executive officer. Prates has backed Lula’s calls for the hydrocarbon producer to change fuel tariffs and play a bigger role in the clean energy transition.

When he pledged to reduce poverty among Brazilians in his inaugural address on Sunday, Lula said that “particularly the public banks [state development bank] BNDES and companies that foster growth and innovation, like Petrobras, will play a fundamental role in this new cycle.”

The statement sent shares in state-controlled Banco do Brasil down more than 6 percent in the first two trading sessions of the year before regaining ground later in the week. Public insurer Caixa Seguridade, a arm of public lender Caixa Econômica Federal, also fell.

“Investors are concerned about Lula’s control of state-owned companies [and whether he] will use them to implement social policies at the expense of economic efficiency and ultimately hurting their profitability,” said Jared Lou, portfolio manager at William Blair Investment Management.

Since Lula’s narrow election victory over right-wing incumbent Jair Bolsonaro in October, the local Bovespa stock index has fallen 6 percent.

Luiz Fernando Figueiredo, a former central bank governor and founder of hedge fund Mauá Capital, said the chance of cheap credit being expanded is “very high” and it could lead to “chicken flight growth,” referring to growth spurts that follow a slump.

“[If] If you expand credit in a subsidized way, it really hinders the central bank and leads to higher interest rates, which costs us all a lot more,” he said.

Petrobras, headquartered in Rio de Janeiro and controlled by the Brazilian state, is another likely battleground between Lula and investors. After nearing bankruptcy during the former Rousseff administration through a combination of subsidized fuel, bad investments and a corruption scandal, the company has regained ground in recent years.

Through divestments and a focus on its rich offshore crude oil reserves, it is now reporting record profits and dividends that investors fear may be at risk.

Lula has pledged to change the company’s pricing policy, which currently ties fuel prices to international benchmarks, in a bid to lower consumer bills. He has also promised to invest more in refinery assets.

“The headlines suggest a company that may be okay over time, but will most likely be encouraged or directed to invest in things that may be less than the upstream exploration and production that Petrobras is focused on Get a return,” said Eduardo Figueiredo, head of Brazil equities at UK fund manager Abrdn, which reduced its holding in Petrobras following the October election.

“Investments in finishing have historically been very negative for value creation or even destructive for the company,” he added.

Petrobras stock rallied somewhat after Prates, whose appointment has yet to be confirmed by the company’s board, insisted it would not decouple fuels from international prices.

Tiago Cunha, a portfolio manager at Ace Capital, which sold its Petrobras holdings after the election, said while Lula’s focus on social responsibility may sound good to ESG investors, “It’s important to remember his track record on each of these issues in previous years terms to remember in the office”.

“There is no doubt that companies today should be socially responsible. The problem is: where is the line between social responsibility and using corporate cash flows for populist measures? Is it fair to use minority shareholders’ investments for government policy?”

But not all investors are concerned. US investment firm GQG Partners recently announced that it has built a stake of over 5 percent in Petrobras, making it one of the largest minority shareholders.

“It is an impressive turning point [at Petrobras] why would lula want to ruin that? Mainly because the state is the largest shareholder and benefits from the dividend payments. We think the fears are overblown,” said Polyana da Costa, a GQG analyst. Investors fret over Lula’s approach to Brazil’s state-controlled companies

Adam Bradshaw

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