As political turmoil boosts volatility in Brazil’s markets, some of the country’s biggest investors are seeing a haven in government bonds.
Money managers from Ashmore Group Plc to Pacific Investment Management Co. say the notes were unfairly beaten down in the selloff last month sparked by concern President Michel Temer could be ousted amid accusations he endorsed illegal payments to a jailed politician. Their optimism boils down to the idea that the economic reforms Temer had championed -- and investors applauded -- will eventually get done no matter who is president.
“Brazil looks attractive now,” said Jan Dehn, the head of research at London-based Ashmore, which oversees about $52 billion of assets. “I like it more now than before.”
With foreign investors lightly positioned in Brazil compared with 2010, when fast economic growth fueled bullish bets, the sharp tumble last month created an opening for traders to scoop up bonds at attractive prices, according to Dehn. Local notes pay a yield that’s 8 percentage points above inflation, one of the highest spreads in emerging markets, even amid forecasts for faster economic growth and a slowdown in consumer-price increases.
The selloff seen May 18 was a stark reversal from the mood that had prevailed in Brazil. Investors anticipating that Temer would end the deepest recession in a century, shore up the country’s fiscal standing and curb inflation made its assets the world’s top performers last year.
The rout came after revelations that executives from the country’s biggest meat-packer had implicated Temer in the hush-money scheme, which sent the Ibovespa down by the most in eight years and dollar bonds down the most on record.
Whether Temer is eventually impeached, resigns or clings to power until his term expires in January 2019, Dehn expects his economic initiatives to live on. Temer is pushing for a deeply unpopular overhaul of the federal pension system that supporters say is needed to get the country on solid financial ground, as well as efforts to loosen up rules governing the labor market and reduce government expenditures to fulfill the cap approved last year.
Brazil’s real fell 0.8 percent to 3.2708 per dollar as of 9:52 a.m. in New York.
For traders with the fortitude to ride bouts of volatility, Brazilian bonds represent better value than stocks as interest rates fall, according to Monty Guild Jr., the chief investment officer of Guild Investment Management Inc., whose call in March 2016 to buy Brazilian equities amid efforts to impeach President Dilma Rousseff proved prescient. The Ibovespa has returned 25 percent in the ensuing 14 months. Whether Temer stays or goes, Guild expects the president’s reform agenda to stabilize Latin America’s largest economy.
The 74-year-old money manager is less confident in further equity gains, figuring that much of the potential advance has already been priced in.
“Clearly there may be more crises,” he said. “Brazil has become far less predictable.”
If Temer, who denies any wrongdoing in connection with the corruption allegations, resigns or gets forced out, the house speaker would take over for 30 days before Congress elects an interim president. Brazilians would then vote for their next leader as scheduled in October 2018. An early election could be held if Congress approved a constitutional amendment, which requires three-fifths support in both the lower house and Senate.
A delay in Temer’s legislative goals may be more damaging to the standing of his center-right PMDB party than to Brazil’s finances and economy, as pension changes wouldn’t have a noticeable impact on fiscal accounts until 2019 or later, according to Gene Frieda, a London-based global strategist at Pimco. He said that while he supports the effort, the way the PMDB has pinned its re-election fate on unpalatable reforms is “one of the most bizarre things I’ve ever seen in my career.”
Frieda counts Brazilian local notes and currency among his favorite assets in emerging markets given the attractive risk premium from the Temer scandal and the likelihood that a reformist president will be elected next year. The search for yield has traders much more willing to tolerate nations with political risks, even if they’re initially shaken, he said.
“When you step back from it, independent of politics, how vulnerable is Brazil?” Frieda said. “No matter what happens with this president, the president in 2018 is reasonably likely to be a reformist.”
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