Mr Smith points out: “This all led to a significant depreciation of the Brazilian real, falling by over 60 per cent against the dollar from 2011 to early 2016, a sharp rise in the country risk premium, and credit rating downgrades taking away Brazil’s investment grade status.”
Figure 1: Brazil GDP and Brazil inflation graphs
Source: Neptune Investment Management/Bloomberg
Former President Rousseff was eventually impeached in August 2016, to be replaced by President Michel Temer.
Mr Temer has been passing through a series of reforms in Brazil, including a pension reform, but was recently caught up in a corruption scandal himself, although he is not going on trial and has promised to stay on in office until the end of his term in December 2018.
Now, Mr Smith observes even if there were another political crisis in the country, this would not likely result in an economic crisis or see the Brazilian economy fall back into recession.
“Following the recent correction, Brazil is trading at just under 11 times forward earnings, a discount to emerging markets and in line with its five-year average,” he says.
“Earnings are recovering from depressed levels following the recession, and if the government is able to continue passing reforms, confidence and investment will continue to recover, supporting the economic acceleration and corresponding pick-up in earnings.”
Russia and oil
The fortunes of emerging market countries are inextricably tied to commodity prices, and Russia is no exception.
Opec, the Organisation of the Petroleum Exporting Countries, has been trying to keep tabs on the oil price by extending production cuts to certain countries, including Russia.
In August this year, the US applied further sanctions to Russia which may be a concern to investors in the region.
But Colin Croft, manager of the Jupiter Emerging European Opportunities fund, says the latest sanctions should not have any significant impact on the Russian stockmarket.
“The Russian economy has already adjusted both to sanctions and the fall in the oil price from around $100 a barrel back in 2014 to the range of $45-55 a barrel we see now,” he observes.
“The economy contracted during 2015-16, but has already returned to growth (+0.5 per cent year-on-year in the first quarter of 2017, with expected full year growth of 1.3 per cent for 2017).”
He believes the oil price is far more important both for the Russian economy and the Russian market than sanctions.
“The government budget is run on an assumption of an oil price averaging $40 a barrel, so the $45-55 [per] barrel range we see now is a comfortable one for the Russian authorities.
“The Russian market, in my view, is attractively valued and offers good cash returns – its dividend yield is around 5.5 per cent, which compares to just 3.7 per cent for the FTSE All-Share index.”