Lately, emerging market investors were surely following with certain detail the ongoing political saga which has pushed the largest emerging market economy in dire straits.
The political impeachment put forward against Rousseff, Brazil’s current President, for breaking budget laws led to huge uncertainties from political point of view.
From an investor’s perspective, the market reacted positively on the view that the removal of Rousseff could trigger a change of management style and possibly a turnaround in the current sluggish economy.
Let’s look at the sequence of events.
All kicked-off when the current administration was embroiled in a vast bribery scandal centred on the state-run oil company, Petrobras. The said corruption news had led to a series of resignations of prominent Government appointees, along with a huge sell-off across the board with the Brazilian real (BRL) depreciating by circa 31 per cent in 2015.
On April 17, the last needed vote to continue the impeachment charges was casted, with the two-third threshold being reached. On the news the BRL spiked by just over two per cent, the Brazilian equity market jumped and bonds rallied.
That said, the positive build-up commenced a week earlier as rumors of impeachment increased and what seemed bad for President Dilma appeared to be good for the nation’s financial market.
Yet again another unexpected turnaround occurred this week after the interim Chief of the lower house called for a new vote on Rousseff’s impeachment, thus trying to cancel the previously successfully passed vote. Once again the said move pushed the Brazilian currency and equity market towards remarkable declines.
Yesterday investors were once again pleased with the fact that in a turn of events, the Brazilian Senate voted in favor of putting the President on trial with 55 votes in favor 22 against.
It is now up to the vice-president, Michael Temer who will take her place for up to 180 days. Should two-thirds of senators then vote to remove Ms Rousseff from office, Mr Temer would serve out the rest of her term, which ends in 2018.
Undoubtedly, the vice-president will face a daunting task, with the economy in a recessionary mode for the past five quarters. Currently some 10m Brazilians, or one in ten workers, are jobless, while inflation has eased slightly but remains near 10 per cent, thus the eroding purchasing power further.
To restore confidence Mr Temer would first need to reduce the budget deficit, which has ballooned from 2.4 per cent of GDP to 10.8 per cent since Ms Rousseff first took office in 2011. That would require a combination of spending cuts and tax rises, neither of which are populist decisions.
Certainly, in my view several Brazilian companies are currently still undervalued despite the recent gathered gains. In fact, looking at fixed income emerging market indices, on a year-to-date basis these are registering gains of close to 7.6 per cent, with the prime contributors being Brazilian corporations due to their 27 per cent weighting in the index.
Hence risk-lovers might still find value by dipping into Brazilian debt, however investors should be conscious that corporate governance in Brazil is surely not one to bet on.
Disclaimer: This article was issued by Jordan Portelli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.