Michael Reynal, portfolio manager at the $287 million RS Emerging Markets Fund (GBEMX) puts it this way: "Politics are ruining a good investment story in Brazil."
It has oil. It's the No. 1 orange juice exporter, coffee exporter, sugar exporter, iron ore exporter, beef exporter and the No. 2 soybean exporter. It has a diverse economy and strong banks. It has a growing consumer class and they're constantly aching to spend like crazy North Americans.
Nobody cares.
A colossal corruption scandal involving Petrobras and the ruling Workers' Party has hundreds of thousands protesting in the streets. Two weeks ago, some of them even called for impeachment. And this week, a polling firm called MDA showed that more than 59% of respondents think president Dilma Rousseff should be impeached.
The Bovespa stock index is down over 13% in dollar terms, while the MSCI Emerging Markets Index is up 1.07%. The Brazilian real is down 20.4% against the dollar. Where is the real going from here? And is Dilma going bye-bye?
Nomura Securities asked hedge fund managers, investment bankers and others in the financial services industry those very questions. Here's what they said.
What do you believe are the chances of president Rousseff being impeached? Some 46% gave it a probability of 5.1% to 15%. Another 25.8% were said the odds were zero to 5%, and the same number put those odds as great as 30%. Only 1.6% think there is a 50% chance or more of her being removed from power.
And what is the fair value of the currency? The real is currently trading at 3.20 to the dollar. A total of 61.3% of Nomura's respondents said the fair value of the real was somewhere between R$3.10 and $3.50. The next highest response was 19% of respondents thinking the fair value was between R$3.6 and R$4.0. Only 9.7% think it is fairly valued under R$3 and a smaller amount think it's fair value is over R$4.
Fair value is one thing; where is this thing going this year? The biggest number of respondents, 32.8%, think the real is going to R$4. Another 14.8% said it could weaken over R$4. A small number, 8.2%, think the real will hold firm where it is now, which is closer to R$3.30. Given the fact that the real is already R$3.20, the market is more short the real than it is long.
Brazil's current political crisis threatens its investment grade status. Brazil is currently two notches above speculative grade at Moody's and Fitch, and one notch above at Standard & Poor's. As it stands now, 29% of respondents say there is a 15.1% to 30% chance of Brazilian long term government debt being downgraded to junk. It already happened to Petrobras this year. Moody's cut them last month. Another 27.5% said that there was a 30.1% to 50% chance. Only 25% said there was less than a 15% chance.
What this survey of investment professionals shows is that, near term, the bravest are neutral on Brazil.
"We want to see how things shake out politically," says Reynal. An RS Investments analyst is currently in Brazil kicking the tires on some corporates. "We're poking around," Reynal says.
