Large-scale protests in Brazil against the recently elected government have caused emerging market fund managers to heavily scrutinise the country and their exposure to it.
The combined forces of a volatile stockmarket, a rapidly declining currency and an institutional corruption scandal at state corporate Petrobras are giving the managers cause for concern.
Earlier this month a list of 54 politicians and senior officials was approved by the Supreme Court for investigation in relation to the Petrobras case, which is centred around bribery allegations.
The case prompted hordes of protesters to take to the streets of Brazil, where they called for the impeachment of president Dilma Rousseff because of the state-level corruption that is alleged in the Petrobras scandal.
Ms Rousseff narrowly won re-election in October last year but she was not the market’s first choice. This has been borne out by the MSCI Brazil index’s 2.9 per cent fall in dollar terms since her term began, compared with a rise of more than 5 per cent by the MSCI Emerging Markets index.
Hermes senior investment analyst Oliver Leyland said: “When you have institutionalised corruption in one of the country’s biggest state-owned enterprises, it poses certain questions about corporate governance across the whole of the country.
“Let’s say the opportunity costs and the risks have gone up.”
The £334.4m Hermes Global Emerging Market fund had been underweight Latin America and Brazil for “some time”, with the team citing better valuation opportunities in Asia.
Mr Leyland suggested now was the time to start “doing their homework” on the country.
“Unfortunately, [Brazil] has entered a period of instability with a current account deficit and the dollar strengthening, and it has [all] piled up,” he said.
Lazard’s James Donald, who runs the £944m Emerging Markets fund, said many stock prices had surged during the pre-election polls as Ms Rousseff’s serious challengers gained favour. “[She] was not the market’s choice,” he said.
“It was felt the Brazilian economy could be run a lot better. There were a lot of bottlenecks in logistics and infrastructure that should be tackled head on.”
But Mr Donald said Ms Rousseff should be “given marks” for her choice of finance minister, Joaquim Levy – an economist who was the former president of Bradesco Asset Management, a division of Brazilian bank Bradesco.
“He seems to have convinced [Ms Rousseff] that Brazil should be trying to get a primary surplus,” Mr Donald said.
The manager suggested the real’s demise could worsen if the country lost its investment grade, something that had been mooted by analysts.
However Luis Carrillo, manager of the $997m (£670m) JPMorgan Latin America Equity Sicav, thought the falling real said more about the strength of the dollar than it did about domestic problems.
“We have been of the view the real was very expensive; it is now looking cheap,” he said.
“However, when currencies return to normal they tend to over or undershoot, so we see some continued pressure on the real. But that is less to do with what is happening in Brazil and more to do with the dollar play.”
The manager added the pressure on the currency, the recent stockmarket falls and the protests had also forced him to reassess his exposure to the country.
“We were more pessimistic [on Brazil] six months ago than we are now,” Mr Carrillo said.
“At the October elections we held the view it was going to be another four years of the same, which was not good in economic terms. But it turned out to be a recognition from the administration it had done things badly for the previous four years.”
He added the appointment of Mr Levy, who had been allowed to “undo most of the things they had done in the previous four years” had been a “fantastic surprise”.
Protest numbers
22
Number of Brazilian state protests that took place across the country earlier this month
30¢
Amount of US dollars a Brazilian real will currently buy you – an 11-year low
