Scripting a happy ending to Brazil’s current real life soap opera could prove an Olympian challenge

The Latin American investment world has often been described as one of the emerging markets most volatile regions.

But in recent times Brazil has surpassed itself in the volatility stakes with the impeachment of its prime minister and events leading to the country issuing a ‘state of financial calamity’ emergency notice. Add concerns about the Zika virus and the picture for Brazil does not appear too rosy.

Or, when it comes to the investment world, is there perhaps more to this story than meets the eye?

Gary Robinson reports on a country in crisis less than 50 days before it begins hosting the Olympic Games.

There is nothing a Brazilian loves more than a good soap opera and drama series, or, as they are described in the region, telenovelas.

Often depicting aspects of daily life in a country, telenovelas have been a centerpiece of Brazilian life since the first Brazilian telenovela, Sua vida me pertence, was released in December 1951.

But fact and fiction appear to be blurring somewhat, as the country just has to switch on its news channels to see one of the most bizarre soap opera plots that you could imagine.

Just last month (May) Dilma Rousseff, Brazil’s first woman president, was suspended from her post after the Senate voted to impeach her. (See box)

With the state of Rio de Janeiro declaring a financial emergency that could lead to a total collapse in public services and concerns over an outbreak of the Zika virus it is, perhaps, not the best backdrop to the start of the 2016 Olympic Games.

When one looks back at the previous Olympic Games that took place in London in 2012, the swell of UK national pride, the feel good factor and a boost to the economy were all evident.

So can the Olympics save Brazil from itself? Or is a month of games just a sideshow or an unwelcome and costly distraction?

Fund manager views

Fund managers in the emerging markets sector and financial advisers in the region appear to be split in their views on Brazil.

Ed Smith, asset allocation strategist at Rathbones is particularly damning.

“Brazilian markets have delivered a powerful momentum rally that appears to be based on little more than hope,” says Smith

“The economy is in the stink, mired in the worst recession for a century. Faced with high unemployment and inflation, monetary policy can be little more than a very mild palliative, while a significant fiscal austerity programme seems necessary if the public finances aren’t to tip into crisis too.

“A crisis caused by a decade of misallocated capital and a road to recovery impeded by government austerity and monetary policy impotence – that’s not appetising, even for investors hungry for a bargain,” he says.

Meltdown?

John Peta, head of emerging market debt at Old Mutual Global Investors both agrees and disagrees, believing that the situation provides an opportunity for investors.

“Is it a meltdown? Well yes and no really,” he says. “The returns are actually one of the best performing markets at the moment. Things have been bad here for a while but when you look at fixed interest and bonds, local markets are 38% up for this year alone.

“Is this to do with the Olympics? I don’t think so and don’t think that there will be an uplift after the Olympics.”

There is a lot of bad news out there Peta points but his use of the term ‘it is darkest before the dawn’, provides some encouragement.

“Brazil is one of (the emerging markets region’s) the biggest bond regions and with a new Government trying to do a better job, a lack of anything else that is negative, could be good news for Brazil,” he adds.

Lawrence Hamtil, a fee-based financial adviser at US wealth management firm has an acute understanding of the region thanks to his Brazilian wife, his time living in the region and their dealings with family still living there.

“Unfortunately, it seems many in Brazil are trying to leave the country,” he says. “There have been articles citing Brazilian money headed abroad to places like the US, as well as anecdotal evidence of people trying to emigrate to Europe and Canada, for example.

“They are pretty disheartened by inflation, a problem in Brazil historically.”

Olympic boost ‘unlikely’

Patrick Mange, head of APAC and Emerging Markets Strategy at BNP Paribas, echoed sentiments that the Olympics factor is unlikely to play in part in giving markets a boost.

Mange, shrugged of the Olympics factor as “not making a difference at all”. Instead he prefers to focus on the outcomes of the impeachment and the opportunities for bonds.

“The Brazil story is more positive on bonds than equities,” he said

“Confidence could turn (households and businesses) thanks to impeachment process.”

He said that he is now waiting for completion of impeachment (mid August) and municipal elections in October to think about new positioning in terms of investments.

Recession bottoming?

Gonzalo Pángaro, lead portfolio manager, Emerging Markets Equity Strategy at T. Rowe Price said that Brazil has experienced its worst recession in a century, but he now sees signs that parts of the economy are bottoming.

However, despite being positive, a recovery won’t emerge until tough reforms are implemented, he warns.

“Investors are encouraged by the likelihood of a regime change, but the way forward will be fraught with challenges and uncertainty,” said Pangaro. “We believe Brazil offers attractive longer-term investment opportunities. 
In our view, many stocks are trading at attractive valuations, and we have built a slight overweight exposure to the country within our emerging markets portfolios.”

A country in crisis

The impeachment: Last month Dilma Rousseff, Brazil’s first woman president was suspended from her post after the Senate voted to impeach her.

An ally of her predecessor, popular left-wing President Luiz Inacio Lula da Silva, she was first voted into office in 2010 and won a second term in 2014.

Mass protests have followed Rousseff around since 2013.

She now faces the threat of impeachment over allegations that she illegally manipulated finances to hide a growing public deficit ahead of her 2014 re-election.

She strongly denies this charge insisting that her removal from office more or less amounts to a coup.

Vice-President Michel Temer is acting as interim president while Ms. Rousseff’s impeachment trial takes place in August this year.

 

The financial “calamity”: The state of Rio de Janeiro has declared a financial emergency less just a matter of weeks before the country hosts the Olympic Games.

Interim governor Francisco Dornelles warned that the “serious economic crisis” could even stop the state from honoring commitments for the Games unless a Government, already in crisis, both financially and in terms of leadership, provides a bailout.

Dornelles said the state faced “public calamity” that could lead to a “total collapse” in public services, such as security, health and education.

The state has projected a budget deficit of $5.5bn (£3.9bn) for this year alone.

 

The virus: There are also concerns over an outbreak of the Zika virus, which has been linked to birth defects, and the impact it could have on the city’s tourism. Indeed with 500,000 foreign visitors expected to hit Rio during the Olympic Games, bringing in much needed economic benefits, the impact could see that figure drop dramatically.

This article first appeared in the July/August magazine edition of International Investment. Please click here to subscribe to our magazine in print or digital version, or to receive our daily news bulletins.

 

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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