Shares in some of Brazil’s largest state-controlled companies, including Petrobras and Banco do Brasil, have been volatile for the week as investors worry that the new administration of Luiz Inácio Lula da Silva will take a more interventionist approach.
Petrobras, Latin America’s biggest energy group, at one point plunged more than 10 per cent on the São Paulo stock exchange after Lula used one of his first decrees as president to end a planned $60bn privatization of the oil and gas producer.
The move follows Lula’s nomination of Jean Paul Prates, a senator in the Labor party, to be Petrobras’ next chief executive. Prates supported Lula’s call for hydrocarbon producers to change the way they fill their fuel and play a bigger role in the clean energy transition.
As he promised to reduce poverty for Brazilians in his inaugural speech on Sunday, Lula said that “public banks, especially [state development bank] BNDES, and companies that promote growth and innovation, such as Petrobras, will play a fundamental role in this new cycle.
The announcement sent shares in state-controlled Banco do Brasil down more than 6 percent in the first two trading sessions of the year, before rebounding later in the week. There was also a decline in listed insurance company Caixa Seguridade, an arm of public lender Caixa Econômica Federal.
“Investors are concerned about Lula’s control over state-owned companies [and whether he] will be used to implement social policies at the expense of economic efficiency, and ultimately undermine profits,” said Jared Lou, portfolio manager at William Blair Investment Management.
Since Lula’s narrow election victory over right-wing leader Jair Bolsonaro in October, the local Bovespa equity index has fallen 6 percent.
Luiz Fernando Figueiredo, former director of the central bank and founder of hedge fund Mauá Capital, said that the possibility of cheap credit being extended is “very high” and that this could lead to “chicken flight growth”, referring to continued growth. a slump.
“[If] you expand credit in a subsidized way, it really stifles the central bank and leads to higher interest rates, which costs more for all of us,” he said.
Rio de Janeiro-headquartered Petrobras, in which the Brazilian state has a controlling stake, is another battleground between Lula and investors. After nearly going bankrupt during Rousseff’s administration due to a combination of subsidized fuel, poor investments and corruption scandals, the company has recovered in recent years.
Through divestment and focus on its rich offshore crude oil reserves, it is now reporting huge profits and dividends, which investors fear could be at risk.
Lula promised to change the company’s pricing policy – which currently calculates fuel rates to international benchmarks – in order to lower bills for consumers. He also promised to invest more in refining facilities.
“The title refers to companies that may not last long, but will be encouraged or directed to invest in things that have the potential to generate lower returns, compared to the upstream exploration and production that is the focus of Petrobras,” said Eduardo. Figueiredo, head of Brazilian equity for UK fund manager Abrdn, which reduced its holdings in Petrobras after the election in October.
“Investment into refining historically has been very negative to create value, or even destroy value for the company,” he added.
Petrobras shares recovered slightly after Prates, whose appointment has not been confirmed by the company’s board, insisted that it would not remove the fuel from international tariffs.
Tiago Cunha, portfolio manager at Ace Capital, which sold Petrobras holdings after the election, said that Lula’s focus on social responsibility could be good for ESG investors, “It is important to remember the track record in each of these topics during the previous term in office”.
“There is no doubt that today’s companies must be socially responsible. The problem is: what is the limit between social responsibility and the use of corporate cash flow for populist measures? Is it fair to use the investment of minority shareholders for government policies?
However, not all investors are worried. US investment firm GQG Partners recently announced that it has built a stake of more than 5 percent in Petrobras, making it one of the largest minority shareholders.
“It’s an impressive turnaround story [at Petrobras] why does Lula want to destroy that? Mainly because the government is the largest shareholder and benefits from dividend payments. We feel very scared,” said Polyana da Costa, a GQG analyst.