Brazil’s stock market plunged more than 10% immediately after opening Thursday, wiping out almost all its gains for the year. Brazil’s currency, the real, also tanked more than 9% against the dollar, its worst day since the global financial crisis in 2008.
Markets sold off after the new bribery allegations surfaced against Brazil’s president, Michel Temer. The fear was mainly caused by the political turmoil; questions arose on how and when Brazil will continue the pension reforms to stable their fiscal accounts, which is critical to reduce the inflationary risk and allows the BCB to implement their stimulus policies.
Brazilian assets are too good to ignore at current valuations.
The market reaction could be overblown. Some of the world’s biggest money managers, who predict the bribe probe against President Michel Temer won’t derail the country’s economic recovery. Brazil’s currency rebounded on Friday after tumbling the most since 1999 as the fresh political crisis ensnared Temer and raised the prospect of impeachment.
- Mark Mobius, the executive chairman of Templeton Emerging Markets Group:
- “It is definitely the moment to be bullish in Brazil. Now, with the pullback, it’s an incredible opportunity”
- Bryan Carter, the head of emerging-market fixed income at BNP Paribas Investment Partners in London, who bought Brazil debt as prices fell last week:
- “Selloffs are just buying opportunities and what is happening in Brazil is positive for long term institutions. This investigation has proven the independence of the judiciary, the inspector general, the police and the Supreme Court, free from presidential pressure. What other emerging market can boast such strong institutions? Brazilian democracy is stronger than it has ever been. This is very, very positive in the long run”
- Viktor Szabo, a London-based money manager at Aberdeen Asset Management Plc, whose fund is overweight Brazil local debt:
- “There is still a chance that Temer survives and delivers on the key reforms. We’ll continue to be overweight Brazil local debt, as the fundamental macro story has not changed (external rebalancing, disinflation), although fiscals are not yet on a sustainable path. Brazil provides one helluva real yield”
- Eric Vanraes, a Geneva-based bond fund manager at EI Sturdza Investment Funds:
- “We have a 7 percent exposure purely in corporate bonds and we’re waiting for huge spread widening to reinvest, because in the long-term it’s a buying opportunity. We didn’t sell or buy last week, we’re monitoring Brazil. No matter what the name of Brazil’s president, this economy will grow”
- Amer Bisat, a New York-based emerging markets money manager at BlackRock Inc.:
- “The situation is fluid and evolving and we are assessing our positioning based on the outcome of the political situation as well as on how the economic policy makers (especially the central bank) will react. The political shock is profound”
When considering fundamental factors, Brazil is even more attractive today at the lower valuations:
- GDP growth is picking up since the beginning of 2016. Available evidence suggests a gradual recovery of economic activity during the course of 2017.
- Brazil inflation falls close to target, which allows the central bank to accelerate the easing cycle began in October, the biggest since the global financial crisis in 2009.
- Brazil current account shortfall is recovering rapidly. In April 2017, the surplus rose to USD 1.2 billion from a USD 0.4 billion surplus a year earlier and matching market expectations.
The noise in the political arena has temporarily over shadowed the attractive fundamentals in Brazil, causing the recent sharp selloff of Brazilian assets, which creates attractive entry levels into those assets.