Brazil’s future in doubt as it battles scandal and recession
AS CHAOS TAKES HOLD, FUND MANAGERS HAVE RETREATED FROM THE COUNTRY IN DROVES
Fund managers that specialise in a single country usually find something positive to say about it, even if it is in the depths of a recession. But not so for Brazil, the country where portfolio managers, like local politicians, businessmen and citizens, have been left scratching their heads about the nation’s economic and political future.
Brazil is not the only emerging market economy to have had a turbulent time this year, but the sheer scale of turmoil has been exceptional.
During 2015, the world’s seventh-largest economy slipped into recession, unemployment soared and Standard & Poor’s stripped Brazil of its investment-grade credit rating.
Its politicians and leading businessmen have been embroiled in a scandal surrounding state-backed Petrobras, the oil company and President Dilma Rousseff faces impeachment proceedings.
As the chaos has taken hold, fund managers have retreated from Brazil in droves. Although they see a small number of bright spots, such as exporters and parts of the fixed income market, portfolio managers also fear the impact of political and economic instability on returns.
Lionel Bernard, who manages the Equity Latin America and Equity Brazil funds at Amundi, Europe’s largest listed asset manager, says: “The strongest conviction I have at this point is that we will not have an [economic] improvement until we have a new political majority in Brazil.”
The performance of Bernard’s Brazil fund has fallen 36.7 per cent in the first 11 months of the year, marginally underperforming its benchmark.
During the third quarter, Brazil — once regarded as one of the world’s growth engines — suffered its sharpest contraction in growth since a new gross domestic product calculation system was introduced in 1996, a fall of 4.5 per cent.
Some commentators suggest its recession could turn into a depression. The country’s stock market has plunged more than a quarter over the past year.
No clear resolution
“The economic and political backdrop [in Brazil] is continuing to deteriorate with no clear resolution in sight,” says Will Ballard, head of emerging markets at Aviva Investors, the UK asset manager.
JPMorgan Asset Management has also decreased its allocation to Brazil by five percentage points this year, says Sophie Bosch, Latin America portfolio manager at the US fund house.
Claudia Calich, manager of the emerging markets bond fund at M & G, the UK fund house, says: “It is impossible to trade the daily noise and headline risk [in Brazil].”
However, she says there are “selected opportunities” in the country among exporting companies, which have benefited from the depreciation of the real. The value of the local currency has plummeted by a third this year. Some argue that rather than pushing for an impeachment, politicians should instead try to rescue the economy. “There is still no consensus on whether [ Rouseff being impeached] would be good or bad for the Brazilian economy,” says Xavier Hovasse, head of emerging equities at Carmignac, the French asset manager.
Petrobras was once the jewel in Brazil’s corporate crown. The state-owned oil company stands accused of colluding with contractors to inflate bids — with contractors allegedly giving kickbacks to Petrobras officials and politicians.
Leading businessmen and politicians have been caught up in the scandal. Eduardo Cunha, the speaker of Brazil’s lower house who this month started impeachment proceedings against Dilma Rousseff, the country’s president, is also being investigated in the Petrobras probe. He has been charged with corruption and money laundering, which he denies.