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Brazil will ‘unravel’ in two years, warns EM credit chief

Brazil will ‘unravel’ in two years, warns EM credit chief

Henderson’s Steve Drew has taken an overweight to Brazilian corporate debt despite expecting the country to ‘unravel’ over the next two to three years.

Speaking to Citywire Selector, Drew said he has a 5.1% allocation to the country in his Henderson HF Emerging Markets Corporate Bond fund, but this was solely a short-term tactic.

‘Two or three years down the road, we think Brazil unravels. We think fiscally Brazil is a real mess, as they keep moving the goal posts, and its monetary policy is on hold because they have rampant inflation. They can’t cut rates and can’t really raise.

‘Looking at a country like Brazil alone is very difficult to see what the ultimate outcome is going to be. But for us, from a credit perspective, it is not very positive but it doesn’t stop us from being short-term overweight.’

Drew has concentrated on companies such as Valé, which he previously championed as an international power player despite its overt sovereign ties, while also holding under fire energy giant Petrobras despite major concerns about its operational health.

‘Brazil as a country has got a structural twin deficit which is a real issue. They are more focused on politics than the economy. We continue to see Brazil being downgraded and companies like Petrobras, for us, are a real problem.’

He expects Petrobras, which remains at the centre of corruption scandals going deep into the Brazilian government, to undergo a major structural change, with China emerging as a surprise bidder for the firm.

‘We think the end game there is for China to take a real stake. We think, through factoring, China has lent them about $10 billion to Petrobras in the last month or so, which clearly helps their cash flow but China will want something for that.

‘They are getting cheap iron ore from Vale and cheap oil from Petrobras, and cheap natural gas from Gazprom, China’s influence around the world is becoming more broad-based and they are almost lender of last resort in some instances to keep their supply line.’

The Henderson HF Emerging Market Corporate Bond has returned 2.47% in US dollar terms since launch. This compares with a 1.8% loss by the BofA Merrill Lynch EM Corporate Plus TR over the same timeframe.

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