Ambiente Global Favorável - Comentário Mensal Setembro / 2024

Music Hi everyone, my name is João Luiz Braga, and I'm an analyst at Encore. I'm here to record the September-October video. Today is October 22nd, it's 12:16 PM.

I'm recording this a bit before lunch. So, let's go. Guys, I'm seeing the market dropping this past month.

Anyway, the point is, we're possibly entering the best global scenarios to invest in emerging markets I could have imagined. Seriously, and we'll explore this topic a bit today. To start, I think it's been a while since we've had so much relevant news between videos.

Like the one I recorded on the 17th. I'm a little late; it's the 22nd now. My apologies for the delay.

But a lot has happened since then, game-changing things. And to start, the first thing is that I released the video. You remember I said the video was already released and dated, because I released it a short time before, a minute before the Fed cut 50 basis points, meaning it was great, the beginning of the so-called US interest rate cut cycle that I've been talking about for so long.

But other things also happened, like this perception of a very strong domestic downturn. Very strong. But what mattered was China, and that's what I'll highlight in this video; we'll talk a lot about it.

But first, as always, let's give an account. I'm always looking over here because that's where my cheat sheet is, so sorry, but the period from last month's video (on the 17th) to now has been bad for us. We were up more than 8%, 8.

5% in last month's video, and the Ibovespa was up about half a percent, so we were doing great, the SMLL was plummeting, so we were doing great, and the market dropped, but the Ibovespa is down about 2. 8%. A little, I don't know, around.

. . In other words, since the last video, it's down about 3%, and we fell even more.

We're now up a little over 8%, now we're up around 3%. So, down about 5%. We gave back some of that alpha, the difference we opened relative to the index over the year.

We should talk about the reason for this throughout the video, but that's it, right? So, even though we lost some of that alpha, we're still outperforming the index across all funds. To recap, the Ibovespa is down about 2.

8% year-to-date. The SMLL, which is the small-cap index, which I like to track because it's more representative of our market, is down almost 15% year-to-date. That's impressive.

In Encore Ações, we're down 1. 5%. So, we're down less than the index; 1.

3%, something like that, better than the index. And the Long Bias, the Prev, because there are several vehicles, these are up, around depending on the vehicle, between 2. 5% and 3.

5%. So, about 6 percentage points better than the Ibovespa, much better than the SMLL. So, relatively speaking, it's good, but I'm sad to have lost that money this month.

We even had some hedges; I'll talk about that at the end of the video, but the hedges helped a little, but imagine if we hadn't had them. And we'll work to get back to the good returns we had last month. Another announcement I have to share with you all, which makes me very happy, makes the whole team here very happy, is that we made it onto the select list of top funds at BTG.

That's great news! We're honored to receive this ranking. So, the team there at BTG, the offices, private banking, everyone, can count on us.

Reach out if you want a meeting, a chat, it's a pleasure to be close. And remember we're on many other platforms, including XP, where we're also a top fund. What an honor!

We're on both. It makes us very happy; it shows that we're truly independent. And hopefully other platforms will also consider Encore Long Bias as a good option for their clients.

We're here; anyone who wants to chat is always welcome. We'll work hard to achieve that and honor those who give us this opportunity. But let's go; let's talk about the market outlook.

Let's start with the United States. Well, sooner or later, the interest rate cut cycle finally arrived. And we started off right.

You remember that in last month's video, we were saying that we even thought there was a greater chance of a 50 basis point cut, a half-percentage-point cut. And it happened, but it wasn't certain, it wasn't obvious. The market was pretty divided on the size of the cut.

And I'll remind you again, you've heard me say this a thousand times: what made our lives hellish 3 or 4 years ago, when we started Encore, by the way, soon we'll be celebrating the fund's 4th anniversary. My goodness, how time flies! But anyway, what made our lives hellish back then was the whole world raising interest rates at the same time, and now we're exactly in the opposite phase, as we've been saying, the whole world cutting interest rates, we've kicked off the initial phase with the United States.

There are strategists who say that by the end of the year—I showed this graph, I think it wasn't last month's video, but two months ago— that by the end of the year, 80% of the world's central banks will be cutting rates. So, what made our lives hellish 3 or 4 years ago, may now make our lives better. And, in truth, what's also been happening this month, what's new this month, which is maybe a problem, is another one.

We've talked here several times about the fear that the US is entering a recession, and that would be terrible for us, because the world, the market going into protection mode, would mean that it would pull money out of emerging markets, out of Brazil, just for those who haven't gotten tired yet of hearing me talk about the Dollar Smile, I always talk about this theory, that when the US is very strong, money goes there, we get forgotten, and when the US market is very weak, in a recession, a big problem, we go to this side, the left side of the Dollar Smile, where Brazil also gets forgotten for another reason, people worry and take the money there, no one wants to be in an emerging market with the US in a recession, they're terrified, and so on. So, it's good for Brazil when we're in the middle. I always talk about this.

And we flirted with that recessionary side several times in recent months. I even talked in these videos about the Sam Rule, which said that when that strong change in unemployment came, it would already indicate a recession. Anyway, that happened a few times.

And the news this month is that there was a flood, a flood of strong data in the United States. So, I'd say that fear of a recession is over. At least it's been postponed considerably, which is great because it helps us get out of the left side of the Dollar Smile and move more toward the middle, to the Goldilocks scenario, where the US continues cutting rates, but the economy is strong.

And what was this data? Just to mention a few, I'll put it on the screen. I'll be quick; there was a ton of data, but just to quickly mention it, from last month to now, on the 26th of last month, there was a better-than-expected GDP.

Then there were sentiment indicators, ISM, etc. , better than expected, stronger than expected. Then, at the beginning of the month, which is always the first Friday of the month, came the payroll data, the employment data from there.

Not only was it much stronger than expected, 223 versus 125, but there was also a strong upward revision. Anyway, unemployment falling, wage inflation rising—it was strong across the board. Then, on the 10th, there was the CPI, inflation stronger than expected.

Then, more recently, retail sales were also much stronger than expected. And so on; it was a flood of strong data. No one's talking about a recession for a while.

In fact, the Atlanta Fed makes a forecast called GDPNow. It takes this data and projects the GDP for the current month and quarter. This is for this quarter, they went from a 2.

5% GDP increase to 3. 4%. Guys, so don't worry for a while about the left side of the Dollar Smile, because it's good for us.

In fact, I'd even say that the risk now is fewer interest rate cuts. Like, anyway, it's us going too far to the right side of the Dollar Smile. That happened, okay?

If you look at these two charts here, I'll show them to you. This one on the left is the 2-year Treasury yield. The 2-year yield is exactly how you price the rate cut cycle, which was plummeting, meaning more cuts.

And in this last month, at the beginning of October, which is exactly when this data started coming out, the 2-year Treasury yield went from 3. 6% to 4%. And that, of course, pulled up longer-term yields, 10-year yields as well, from 3.

8% to 4. 2%. That's basically taking away a stronger economy, taking away rate cuts—all of that— transforming that into, as I usually show—I also usually show this, and I'll show it today— for the Copom meeting, the yield curve in Fed meetings, which would mean, in cuts, it's basically this screen here, here's how the cuts look today, and here's how they looked on the 18th, the day they cut 50 basis points, a day after I recorded my last video.

So, you notice, in the meeting on November 7th, previously there was more than one rate cut priced in, meaning something between 0. 33, something between 0. 25 and 50 basis points.

Now, there's no rate cut priced in, no full rate cut priced in; it's 0. 23, a high probability of a cut. And so it goes, 2.

7 rate cuts priced in for the second meeting; now it's only 1. 6, meaning there are no two rate cuts priced in for two meetings. Four cuts, more than four cuts priced in for three meetings a month ago; now there aren't even three cuts priced in; it's like there's a pause in the middle.

And so it goes. If you look at the terminal rate, people thought the US would cut rates until it reached a terminal rate of around sub-3, 2 and something; now the terminal rate is almost 3. 4%, meaning it's a smaller rate cut cycle than before.

Is that bad? I don't know. To be honest, I think the net effect between the risk of recession disappearing and fewer rate cuts is positive for emerging markets, because, in a way, okay, fewer rate cuts, but this scenario makes foreign investors more comfortable in saying, "What's out there?

" And so, it's not that there won't be cuts; the Fed will continue cutting rates to reach its neutral rate with a healthy economy. So, it seems almost too good to be true. So, the winds from the US, I think, were very good this past month.

If we were flirting with recession, it would have been worse; there would have been a greater chance of us being ignored. That's it for the US. There was another very interesting thing I wanted to share with you.

It came out, I think yesterday or the day before yesterday, a Goldman Sachs report that was very interesting from one of its strategy teams, basically—I'll put it on the screen—their point is a conservative outlook for the S&P 500. They think that given the high valuation, but in reality, it's a concentration effect in a few S&P names, which makes it so that, according to their modeling, the S&P 500 is not a very good investment over the next 10 years. They think, doing this modeling—obviously, within Goldman Sachs, there are different models; this is one— aspect—that they say the expected return on the S&P 500 over the next 10 years in the base case is 3% per year, and nominal, okay?

Meaning, real 1%, very low. And if you take the same S&P 500, but not the way it is, the S&P 500 ETF, but rather the S&P 500 Equal Weight index—taking it, weighting all 500 companies equally— that return goes from 3% to 7%. Meaning, it's not that the US stock market will perform poorly, but it's this concentration, what they're saying is that the largest companies will perform a bit worse than the overall market.

And why do they say that? I found that very curious; it's basically this: First, they show here how the concentration of the S&P 500 looks today, right? This chart here—I'm looking over here, actually, I should be looking over there—this first chart shows the size of the largest S&P 500 company relative to the 375th company in the S&P 500, the 75th percentile.

And that company today is worth, like, 700 times more than the 375th largest S&P 500 company today. It's 700 times larger than the 375th company. Then there's a chart that only goes back to the 1970s, but anyway, the concentration of the 10 largest stocks today is 38% of the S&P 500.

That's very, very, very significant, the top 10. So, when you buy the S&P 500, you're buying those 10 companies. Which are, this is their second point, much more expensive—31 times earnings— relative to the S&P 500 excluding them, which is at 19.

Okay, we knew that. What I found very, very interesting about this study, something I hadn't considered much, is that they did a very long study, from 1985 to now, and showed two things: how difficult it is for a company to stay at the top, the power of mean reversion. What does this chart show?

For how many years have all the S&P 500 companies managed to maintain growth of more than 10% in revenue, or 20%? In one year, 10% growth is 91%; in two years, it falls to 77% and 55%; meaning, only 31% managed to grow more than 10% for five consecutive years. 20% is like 15%, it's much lower, and it keeps falling considerably over time; meaning, it's difficult to maintain high growth for a long time.

And this other chart here also shows something similar; it shows it more in terms of margin, in terms of profitability, how many years they can hold up. For example, what percentage of the same S&P 500 companies managed to have an EBIT margin above 50% for how many consecutive years? In the first year, 2.

3%; this already falls to more than half in two years and goes to 0. 8% in three years, and it's a very large drop. So, what they're saying is that the fact that there's concentration in companies that are doing very well, that are growing a lot, that have sensational margins, this tends to cause a reversion to the mean, and because of this concentration in these companies that are like this, the S&P 500 as a whole, the S&P 500 as it is, the S&P 500 ETF, becomes a bad investment.

The S&P 500 Equal Weight would be better. I found that super interesting and wanted to share it with you. We get stuck on this, nothing beats the S&P 500; the S&P 500 is wonderful, except that trees don't grow to the sky, except for the little tree in the story, trees don't grow to the heavens.

Guys, that's it for the US. There's also the election, which I'll talk about a bit more now, when I talk about China. I don't have much to add about that, but this story about the concentration of the S&P 500, I found it very interesting and wanted to share it with you.

But let's move on to the most important point of the video, which is this pivot that China is making toward more stimulus. This is very relevant for us. This is a shift in stance that shouldn't stop there.

I've never seen China do something like, "Oh, let's do a little something here quickly, a measure here, and stop. " No, I think this stance is here to stay. Let's go.

First, I was even sad because in last month's video we showed—and I'll reaffirm now— that things are very bad over there. And in last month's video, I said, "Wow, I want to increase our commodities exposure. " We did increase our commodities exposure back then, before the stimulus, buying Suzano and so on.

We don't make abrupt changes to the portfolio; that's not really our style, but we were already thinking about increasing commodities, and then came this blow to China. Anyway, things are still very bad over there, it's not like it improved overnight; the property market continues to do poorly; the provinces are still heavily indebted, and despite—I even brought the GDP data here for you, the GDP data from this week—which came out a bit better, I don't know if we can believe the number too much, those things, but it did come out better, with some surprises; the GDP was a bit better, actually, with some surprises, especially in industrial production, which was much better, investment not so much, and retail sales in September also seemed to be much better. Anyway, I don't know if we can trust this too much, but even despite this stronger data, there's still a lot of bad news coming, bad sentiment data, PMI is below 50.

Anyway, there's still a lot of weak data coming in. And these two Goldman Sachs charts show—these are very cool charts—they show how the real estate market is still a drag on GDP for a long time, right? They found a way to show the changes in the real estate market, but not directly the impact on GDP, which is the total of everything, the total of everything, wonderful, the total area under construction; but in reality, they looked at land sales, which collapsed, housing starts, the start of home construction, sales volume, the completion of home construction, investment in fixed assets, and then, finally, getting to what really impacts it, but you notice that this, land sales, this is going to drag on for a while.

So, this shows that we're going to have a long period of weakness that should continue to be very negative in 2025, as this chart on the right shows. Meaning, the real estate sector is still a drag on the economy there, a big one. That's why, one of the reasons that even with this Chinese improvement, everyone who thinks about China thinks about Vale here in Brazil, it's not at all obvious; I've seen many people buying Vale because of this Chinese improvement; I don't find that obvious at all.

But let's go; what was actually done? Let's talk a little about what was done over there. It all started—remember, I recorded the video on the 17th; on the 18th of last month, the US cut rates.

On September 24th, surprisingly, China came out with several measures, such as interest rate cuts, stimulus for the real estate sector, direct measures in the stock market, which we'll discuss a bit, and it was a surprise because a week before, before the US rate cut, the Chinese government had a meeting and decided to keep rates stable, a week before. That's why it was so surprising, these measures. And what were they?

First, cuts to interest rates and reserve requirements, the reserve ratio. This means banks need to hold less money in reserve, so more capital for lending and investment. Second, stimulus for the real estate market.

The government cut mortgage rates, lowered the minimum down payment on homes to stimulate sales and growth in the property sector. Third, a direct stimulus package for the stock market. They released 300 billion renminbi in credit for listed companies to repurchase shares.

This boosted share prices and brought confidence to the market, and added another 500 billion for the purchase of stocks and ETFs, index funds by the People's Bank of China. I'll talk a little more about that later. Why were these measures important?

These actions mark a bizarre shift in stance, as I've been saying, regarding the economy, because the government had been cautious; a few months ago, I showed that they weren't even using the limits they themselves had approved in terms of debt issuance, bonds, etc. So, it's a positive sign that the government is ready to intervene much more aggressively to prevent a recession. But what really seems to be a game-changer, which is, in our opinion, even impressive, are the measures related to the stock market.

The size of this stimulus I mentioned for buybacks is 2. 5 times the size of a similar stimulus they did in 2023. That's the 300 billion.

And the total sum, the 800 billion, is about 3% of the free float of the CSI 300, their index. So, it's significant, especially considering that new funds could still be released if the current ones aren't enough. So, maybe we've seen a bottom for the Chinese stock market.

And there's another point; we've been saying this here, because China was bordering on uninvestable. No one in the world had China exposure; on the contrary, there were a lot of short positions, including friends of mine who were short China. And then this news came out, this rush, right?

Everyone started buying. Just to show you here, two charts, right? This one is the FXI, and this one is the ASHR; these are two China ETFs traded in the United States.

When the measures came out on the 24th, this one went up 36%, and the ASHR went up 55%; it was a gigantic short squeeze, gap up, gap up, gap up every day. Gap up every day. Part of that move has reversed, but less than half.

I'll talk a little about that too. But despite this. .

. So, it was very strong in the stock market, because everyone started buying, covering shorts. But despite this initial optimism, when economists sit down to talk about it, the consensus was that, while positive—obviously, it's good— it's not enough.

It's not going to solve the economy, etc. Many people think it has little impact. Goldman Sachs did the math, breaking down each measure, they think it increases GDP by 40 basis points, 0.

4 percentage points. We were seeing it running at 4. 6%, and their target is 5%.

So, it's not like it was a big bazooka, "Oh my God, the economy is going to take off. " No, it's something that helps. But okay, there was that strong impact on the stock market, but not so much on the economy, etc.

At least so far, as you know, I don't think it will stop there, etc. But Louis Vincent Gave of Gavekal came out with a very interesting perspective that I enjoyed reading, which is that we all generally imagine these stimulus measures, they're data released by countries, here, in the US, in China it's more normal, to reflect in the economy, the government gives stimulus to the economy, and the consequence of economic stimulus is the market liking it and pushing the market up, leading to a bull market, a rising market, and that's cool. But Louis Vincent Gave's perspective this time, which I found curious, was like, "What if the government's policy isn't that, to improve the economy?

What if the government's policy is the bull market itself? It's about creating a bull market; to do that, stimulate confidence, all that, right? Because those who are hurting financially in this generation of Chinese people are the millennials; they can't afford to buy houses anymore because they're expensive; the electric cars they buy have depreciated a lot, and besides that, they've seen their stocks fall.

These people there save money in stocks, unlike what they do in Brazil. There, it's stocks; in the US too; only in Brazil is it bonds. They've seen stocks plummet, since then, when they started to change their attitudes, not-so-legal attitudes in the education sector, then the Jack Ma story, then, anyway, interest rates went up worldwide, they saw stocks plummet, to historical lows; multiples are really low over there.

So, if the policy is to improve the stock market, to improve the savings of millennials, I found that approach curious. And what's curious is that they also. .

. Another thing Gavekal shows, which I find very, very, very relevant, is that of the five most recent rallies—those gray areas here—in China, three of them were driven by stimulus, okay? That was this one, from 2009 to 2010, post-crisis.

The one around 2015, which also involved reserve ratio cuts and monetary stimulus. And more recently, post-COVID, obviously, there was also a large stimulus there. So, when there were the last three major stimulus packages, the market performed well there, right?

And then, something here, guys, is just my opinion, I'm being very honest; there's no basis for this; it's purely a guess on my part, for goodness sake, I'm making that very clear. But why did Xi decide to do this on September 24th? And not six months earlier?

Or not in six months? Why? In my humble opinion, the people there calmly waited for the US to begin its rate cut cycle to do this, right?

Right before the Fed meeting, they didn't cut rates. The Fed goes and cuts 50 basis points, and then they come out with stimulus, they come out with the bazooka. There's something there, I think they know exactly what we're tired of talking about here, the Dollar Smile, all that, right?

This global rate cut is very good for emerging markets, and these measures, doing stimulus later is much more effective than doing it earlier, this also reinforces maybe a bit of my thesis that this stimulus, this story, is here to stay, and it's just beginning, and there are other reasons, like the Trump election, Trump becoming more his chances of winning increasing, also makes China worry and be stronger, because they know that negotiating with Trump is more difficult. Which also isn't new news, because Trump was president for four years with Xi, so they know how to deal with him. And then, going into it a little bit, I'll talk a little more about this Trump issue, but going into it a little bit, so, on the 24th, these first measures came out, but it didn't stop there.

I'll tell you a bit. On the 26th, there was a surprise announcement from the Politburo meeting, the party meeting, which wasn't scheduled, and they were more assertive with targets to stop the decline in the real estate market, a commitment to significant interest rate cuts, positive fiscal policy, but in this case they didn't give many details. Then there was a holiday, Golden Week, over there.

A week-long holiday. They returned with more announcements. Then they held a marathon press conference, a marathon of press conferences from the National Development and Reform Commission, their NDRC, which went from October 7th to today.

Then there was a lot of stuff, speculation about the size of the fiscal stimulus, whether it would be 2 trillion renminbi, some people said 10 trillion renminbi, which is about 8% of GDP. The noise started everywhere. They were vague about the size, and the market panicked, it fell, anyway.

It was a lot of stuff, I won't even mention it all; I'll put it quickly on the screen; anyone who wants can pause it, okay? These are the things here that were coming out in all the press conferences, and I won't read them all, and it's not over, okay? On the 12th, there was another press conference, but from the Ministry of Finance, where expectations were very high, that they couldn't release the exact amount of fiscal expansion, the fiscal policy, but they made it very clear, they did this, that it would be very strong, including that they said that fiscal policy could significantly increase central government debt, and that the government has a lot of room to increase that debt.

That was very strong, okay? They also talked about buying inventories, real estate inventory, including using bonds to stabilize the government, to stabilize the market, subsidies for low-income earners to boost consumption, anyway, in our humble opinion, from the standpoint of whether the stimulus was good, strong or not, we found the announcements to be very strong. And now, recently—I'm talking right now— more stimulus rumors are starting to surface, potential issuance of 6 trillion renminbi in very long-term bonds to address, over the next three years, to address some of the local debt of Chinese regional governments.

Anyway, the cannon seems to be still firing; it doesn't seem to have stopped; it should continue. And even so, the market panicked; "Oh my God, they're selling China again," as I showed the drop there, fear of Trump. Which I think is very exaggerated, very silly, because, first of all, the anti-China agenda is as much Republican as it is Democrat.

Second, I know that Trump is more vocal, he talks more about everything, but we already know he was president for four years; just go back and see what he did; he was very vocal, but in reality, it's his way of negotiating; he's more vocal than he actually does, right? He's a negotiator; he's written books about this, his way of negotiating, but at the end of the day, he does less than he says; after all, where's the wall? Anyway, that's how it goes; but the market is always like that, and then it's that short-term trader thing; "Oh my God, the stimulus is 2.

2 trillion renminbi, not 3, so sell. " "Oh my God, Trump is up in the polls, sell. " "Oh my God, China, I don't know what, buy.

" It's that little thing there; that's a big mistake; it's all short-term noise, guys. What matters is to zoom out, and what matters is that the stimulus is back, and it's not a little bit and then it stops; no, it's here to stay; and of the last three times they've done this, I already showed you in the chart here, the market reacted very well. So, focusing on the long term, it's excellent news.

The multiples are extremely low. And here too, in Brazil too. And we'll talk about how we have our domestic problems and all that.

But I guarantee you that there's a global component in our very cheap multiples. Meaning, the high interest rates we've been talking about for, I don't know, how long. Or also these very cheap Chinese multiples; this global context hinders us; it keeps our multiples very low.

So, if we have a re-rating of Chinese multiples, it's a very good tailwind for our companies, for our stocks, around here. It's obvious, right? It's difficult to know which horse to bet on, right?

And I think this decision is far from obvious. This idea that it's good for China, therefore it's good for Vale, I don't know, because maybe the biggest challenge to all these benefits is the market, the real economy, the property market. That's doing very poorly, as I showed at the beginning.

But for other commodities, it might be better. Maybe for consumption. If consumption does well there, but what impacts Arezzo?

It doesn't impact Arezzo at all, but it impacts the multiples of retailers going up. And foreign investors will look and say, "Wow, Arezzo is trading at 8x earnings, let's buy Arezzo. " It impacts flows.

And many people say, "Wow, João, but won't this steal flows? It'll steal flows from Brazil to go to China? " That's also a big mistake, because the fact is that it does the opposite; it makes global investors say, "Wow, maybe it's worth putting a little money in emerging markets?

And any little thing, where it rains, any little thing that splashes over to us here in Brazil is a disaster, because the exit door in Brazil is very small; the entry door is also very small. So, if a little money comes in here, I think it's very good. So, summing it all up, it's what I started saying; it's a global context that I hadn't found so good in a long time, wow, this is great!

The US cutting rates and avoiding a recession, avoiding a recession with a healthy economy, the Goldilocks scenario, the best point on the Dollar Smile, with China stimulating the stock market to appreciate, and its multiples appreciating. And even so, when we look at the market here, it's falling, my goodness; why did we have such a bad month here? Let's talk about the domestic situation now.

My goodness, it's impressive how Brazil doesn't miss an opportunity to miss an opportunity, my goodness, all this happening in the world, and here our government has a gigantic inability to show any concrete proposals for spending cuts, and it keeps going back to the same thing, raising taxes, and that made the market extremely worried, and rightly so; this month there was a giant stress which was the government arguing again about its campaign promise to exempt up to R$5,000 in income tax, and to do that, tax the wealthy, etc. The problem is how to do that, the size of the measure, there are many problems with that, it's a very large measure, and there are people in the market who estimate that the impact to compensate for this tax cut would be R$75 billion, R$80 billion; I've seen several numbers. Then the government says, "No, no, no, it's not that much; it's R$35 billion.

" Then it's screwed; the market thinks, "Wow, it won't compensate, it won't compensate; it'll go to fiscal spending, more spending. " And then Lula gives an interview and says that he really wants to do this R$5,000 exemption and not stop there, that he wants to continue; so, the market gets very worried because he says that, but there's no concrete, practical measure of spending cuts, like, for example, decoupling the minimum wage from social security, BPC, those things; no one wants to do that, right? And with this increase in fiscal risk, the market had no doubt, right?

It hit hard, the exchange rate went up, interest rates went up, right? Today it's hitting the high, which I've never seen; this here on the screen is the NTNB; I've put these two lines here; this blue line is the NTNB now, and this lighter blue line here is a month ago. And you see that this past month, the B was already high there, at 6.

40%, something like that, long-term B at 6. 45%; this has already gone to 6. 70%, 6.

70% and something; I just saw that the NTNB 45 bullet, here, I even brought a chart here of the Tesouro Direto, it's hitting 6. 74%; this is the highest level in its history, since 2017. My goodness!

That's very bad, and the worst part is I can't find anything wrong with it, because, in fact, the market is pricing in a gigantic fiscal risk. And so, with the whole world cutting rates and us raising them because of inflation risk, the Focus forecast is getting worse and worse in short-term inflation. The market is already pricing in a rate hike cycle of more than 50 basis points at the next Copom meeting, more than 50 at the next one, anyway, interest rates going to a terminal rate of more than 13.

25%. My goodness! This is really terrible.

And we even saw last week, I'd say last week, okay? Haddad, Tebet herself, being more emphatic, the issue of spending cuts is super important, but nothing concrete. We have to wait and hope.

Maybe they're waiting for the municipal elections to pass on Sunday to work on this, to focus more on this. Let's see, but we have to wait and hope because if this continues, the government will continue to feel it in the exchange rate and in interest rates, the effects, and in falling popularity, the effects of fiscal imprudence. On the other hand, if we see something concrete and positive in these ridiculous valuations, in these sky-high interest rates, and in this highly favorable global context, wow, I know that I'm even a little sad.

My goodness! Because all we needed was something positive, and we'd see a nice rally. If only they knew.

Anyway, good local news is that starting now, literally now, we're starting earnings season here, and I think they'll continue to be good, because that's how it was in Q1 and Q2. This might help the market breathe a bit. Let's see.

To finish, let's talk a bit about our portfolio, changes this month. In the Long Bias fund, we were hedged; we thought it could fall, but our hedge was pretty big, but it was in the Ibovespa, which is the easiest to do, the most liquid, and it yielded 100 basis points, one percentage point. Okay.

It protected a little, but very little because the index plummeted, right? If I'd chosen some other vehicles to hedge, it might have been better, because the Ibovespa ended up performing much better than domestic stocks during this period. When it was up, Vale even added 3,000 points to the index while everything else was plummeting.

My goodness! This trade would have been better done in another vehicle, but okay, it added one percentage point to the defensive fund. And we also did another trade that worked out well; it was after this difference; we unwound the hedge, and we switched to a Vale put spread, actually, a put spread in options, which yielded another half a percent.

And even so, we underperformed the index. So, you can see how our portfolio, this drop in domestic stocks affected our holdings considerably, especially domestic stocks. Portfolio changes were marginal.

We closed two positions, added two, and a shift here and there, a little bit in the stocks we like. For example, we took advantage of a downgrade from a foreign firm on MercadoLibre, which took MercadoLibre ADRs from the low 90s to 89, we increased our position by 1%, 1. 5%, I don't know, and it's done well since then, up more than 10% in MercadoLibre, that was good.

We increased our Suzano position a bit, which we had already increased in last month's video; since then we've increased it a little bit. And we increased our Arezzo position a bit, Azza, I can't say it that way; it's Arezzo, whose stock continued to fall, and continued to fall, then we increased it, but we think it's ridiculously cheap. So, these were small changes.

We bought two new positions; one was in Eneva, in the offering that happened now, and another in Alos, since we had about 3% in cash, we really like the thesis; we already liked it, we already liked the sector, it's doing very well. We closed two theses; one is Renner, which yielded a nice gain; it did very well, but we believe that expectations for the results are a bit high, and the other one was Vamos; we closed it a while ago; we didn't like the proposal that was made with the Automob deal; we decided to exit that position. The rest, the portfolio remains very similar: Prio, Localiza, Iguatemi, Eletrobras, Vivara, BTG Pactual, Méliuz, Suzano, Azza, Equatorial, Sabesp, Direcional, Cyrela, and so on.

The main idea is that everything is very cheap; we need to be long, given this wonderful global context I mentioned, the valuations here, as you know, but we don't need to be heroes; we just buy round balls, good theses. Right now, we're not hedged and we have no cash in the Long Only fund, okay? So, let's see how earnings season goes, the game continues, let's see if the people here, after the municipal elections, get their act together, show something concrete in terms of improvements, let's hope, that's it, gentlemen, thank you very much for your trust in us, and until next month, see you then.