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EM investors buoyed by Brazil… but Faber remains unfazed

EM investors buoyed by Brazil… but Faber remains unfazed

The Brazilian congress voted to impeach President Dilma Rousseff on Sunday night in the latest twist in the ongoing drama that has enveloped the country’s political system.

The majority needed to advance proceedings was comfortably achieved with Rousseff now set to face a full impeachment process less than half of the way through her current term.

Once the senate agrees to consider the motion, Rousseff and her party will be forced to step down from power temporarily until the full investigation has been completed.

With investors divided on whether the corruption scandal has damaged the appeal of Brazil, Citywire Selector canvassed emerging market and LatAm investors to see what they expect to happen next.

Gloom, Boom & Doom report author and noted investor Marc Faber believes Rousseff will be forced to leave office but doesn’t believe the impact will be huge from an investment standpoint, particularly given much wider problems at hand.

‘My view is that she will have to resign but for a global portfolio this isn’t going to be a big issue. At the moment, there are big political changes happening globally,’ he told Citywire Selector's sister site Citywire Deutschland.

‘In Germany, for example, most people are against Angela Merkel’s immigration policy. There is also a big disconnect in the US between the voters and the government. Brazil’s stock market has gone lower but really the event is insignificant for the world.’

Positive steps in place

Meanwhile, Amundi’s Maxim Vydrine, who oversees emerging market corporate debt, said the impeachment process should be viewed as a strong move towards a better Brazil.

‘The situation is very dynamic at the moment but impeachment is seen as a rather positive development. With a more market friendly president the Brazilian economy might be in a better shape,’ he told Citywire Selector.

‘Our view is that she will be impeached eventually and Michel Temer will take over. He is not considered to be the most market-friendly person but is still a better option.’

Vydrine said the market is reacting positively so far, which is positive given the disillusionment many investors have faced.

‘Brazil was downgraded to high yield last year so there is not much lower you can go. This development might be a positive turnaround if we see a similar situation like in Argentina, when a new government brought a quick turnaround and markets liked it.’

Roberto Lampl, who oversees Latin American investments at boutique group Alquity, said he has upped exposure to Brazil over the past 18 months as the ousting of ‘delusional’ Dilma is hugely encouraging.

‘The upcoming leadership have a reform focused plan to get this economy away from the abyss and on the path to growth. This will be challenging but there really is no other option, and I believe there is a consensus that change is required, while limiting the impact on the weakest part of the population.’

Meanwhile, Steve Drew, head of emerging market credit at Henderson, said most Brazilian assets have priced-in an impeachment result but expects further positivity as the case progresses.

‘The threat of impeachment and the Lava Jato investigations have been a tremendous distraction for Brazil’s ailing fiscal situation for the past year. With regime change, there is the possibility of much-needed fiscal reform.’ 

‘We think valuations for some Brazilian corporates still look cheap by historical standards, and continued strength in the Brazilian real also has a positive effect for many Brazilian companies.’

‘It feels as though the market is positioned for this, with most funds overweight Brazil, but we could see investors start to take profits as the situation progresses.’

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