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TOPIC: Emerging Markets Must Reads Tuesday: Brazil Bargai

Emerging Markets Must Reads Tuesday: Brazil Bargai 4 years 11 months ago #10615

  • KOSTOCKS007
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The future may not be blindingly bright for Brazil’s economy, but investors Tuesday decided Brazil’s market looked like a bargain.

Shares on the Bovespa Index rallied 3.6% Tuesday; the index is up 1.6% this year, compared to a 2.5% decline in the MSCI Emerging Markets Index. One of the Brazil market’s best performers was airline GOL Linhas Aereas Inteligentes (GOL), which jumped more than 17%. Telephony giant Oi (OIBR) rose 12% and Sabesp, the Sao Paolo water utility better known as Companhia de Saneamento Basico do Estado de Sao Paolo (SBS) rose 7%.

The iShares MSCI Brazil Capped ETF (EWZ) rose more than 5%, and the EGShares Brazil Infrastructure ETF (BRXX) rose 3.6%. The iShares MSCI Emerging Markets ETF (EEM) was higher by 2%.

Nomura’s Tony Volpon weighs in on the post-election scenario for Brazil’s fixed-income market:

“Could Monday’s price action be indicative of what is to come? Could Brazil confound and rally from here? We believe the answer is yes. We do not think there is much to discuss about the current weak fundamentals, (4% nominal deficit to GDP [and] 3.7% current account to GDP. We have also written about how any “honeymoon period” between Brazil and the markets is likely to diminish over time. Our view begs the question: why would there be a “honeymoon period” anyway if fundamentals are so bad and prospects for concrete policy improvement so low? We think the markets’ forbearance with Brazil has two root causes. First, despite increasing deterioration in fundamentals, there is no imminent crisis on the horizon.When a crisis comes, and many believe one will at some point in the future, each investor believes he will be quick enough to be one of the first out of the exit door, finding the “greater fool” to buy his position. Rating agencies have contributed to this complacency by recognising the ongoing, multi-year deterioration in Brazil’s fundamentals while, at the same time, talking about the “strength” of its balance sheet (again, high levels of reserves), civil society and policy commitments …

As a Brazilian friend wrote to me yesterday, “the road to hell is paved with high carry.” This may be a little exaggerated, but we think investors would do well to keep a watchful eye on fundamentals over the next few years of the second Dilma Rousseff government.”
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