The precarious future of Brazilian President Michel Temer has split leading emerging market debt managers on how best to play the set-to-be-troubled market.
MainFirst’s head of emerging markets, Thomas Rutz, told Citywire Selector the most-recent allegations against Temer could weaken the country's currency, the real.
‘The last days have been bumpy and the political outcome is uncertain at this stage. It is difficult to speculate at this point, but it may delay reforms and weaken the Brazilian real.’
Despite this, A-rated Rutz, who runs the German group's EM Markets Corporate Bond fund, said the economic situation is much better than it was three years ago.
‘A positive indicator is that the Brazilian central bank’s short-term rate, the Selic, has been progressively cut since last year and that inflation has also fallen sharply.
'This also increases the possibility that the central bank may continue to cut interest rates – the various current scandals should not change this general tendency.'
Rutz said the valuation gap due to the Petrobras corruption scandal, as well the investigation into the quality of meat, created very attractive opportunities to increase allocations and shift positions within the country.
'We increased the holdings in Brazil from 13% to 21% mid-year 2016 and currently still hold above 19%. Our particular preference lies in individual titles in sectors where the recovery is strong, such as exploration, metals, oil and gas, industrials, and commodities.'
However, Vontobel’s head of emerging market bonds, Luc D’Hooge, who is generally positive on the country, but said the team has been gradually decreasing its position in Brazil in the Vontobel Fund Emerging Markets Debt fund.
‘Economic numbers are heading in a good direction. With many components showing positive signs, it looks like, when official Q1 2017 GDP figures are published, Brazil may finally end this deep and long recession. On the microeconomic front, we've also seen an improvement in the business climate.
AA-rated D’Hooge said these improvements are not enough and pointed to uncertainty that economic changes will push bond prices high in the country.
'While at the beginning of 2016 we had a big overweight in Brazil, this is no longer so. We believe that the market is getting a little bit overexcited. For example, we no longer have Brazilian sovereign bonds, but we still like provincial hard-currency debt.'