Reuters/Rio de Janeiro


Some investors are carefully betting that the recent selloff in Brazilian financial markets was overdone, pointing to signs that inflation is slowing and the government is getting its finances in order.
Many expect inflation will come down from its current 11-year high of 8.13%, thanks to the central bank’s interest rate hike cycle of 1.75 percentage points since October, as well as the economic slump’s effect on demand.
Meanwhile, state-run oil company Petrobras is expected to this month post financial statements that have been delayed by a huge corruption scandal, greatly reducing the risk of a major debt crisis that could have cost Brazil its investment grade credit rating.
President Dilma Rousseff’s austerity measures to bring government finances under control have also gained traction in Brazil’s divided Congress.
In response, the real and the Bovespa index have both gained more than 7% since March 19, when the currency closed at a 12-year low. The Bovespa this week hit its highest level this year.
Five-year local rates have dropped 64 basis points to 12.57% over the same period, part of a broad rally in Brazil’s local currency-denominated debt.
“Some things should do better now, particularly if you believe interest rates and inflation are really going to come down from here,” said Bryan Carter, lead emerging markets portfolio manager for Acadian, a Boston-based fund manager with about $60bn in assets.
To be sure, none of the investors and economists interviewed by Reuters see Latin America’s largest economy pulling out of a recession this year. Nor do they expect markets to rally too much, following a rout that saw stocks lose about 20% and the currency weaken more than 30% from the beginning of September to mid-March.
Under the weight of Rousseff’s austerity measures, the economy is expected to shrink at least 1% this year and unemployment is likely to rise.
“Until we see an inflection point in the economy, it’s hard to be bullish about Brazil,” Carter added.
Yet Carter and other investors have already started adjusting their portfolios to take advantage of an eventual decline in inflation and interest rates.
Acadian has been moving out of inflation-linked bonds and into nominal bonds, where it currently has an overweight position, Carter said. It has also been rotating from Brazilian dollar-denominated debt, or credit default swaps, into local-currency denominated debt.
Societe Generale is betting Brazil’s five-year local rates will extend their recent slide, reflecting “a major commitment to fiscal reform.”
Morgan Stanley recently recommended its clients go overweight in Brazil’s fixed-income markets, while upgrading its stocks to neutral from underweight. It said the country may be able to keep its investment-grade credit rating. While economic activity indicators will probably deteriorate further in the next few months, the first benign data points are already being seen on inflation.