Brazil’s currency policies are driving BlackRock Inc. (MALTX) to buy stocks that will benefit from a weaker real while Brown Brothers Harriman & Co. tells its clients the South American country is losing credibility.
Government moves aimed at depreciating the real and helping exporters have led to a 8.9 percent drop in the currency since the end of February, the worst performance in emerging markets. Central bankers signaled yesterday that they may cut borrowing costs to a record low as economic growth slows, even as inflation remains above the mid-point of their target.
Will Landers, who manages $7 billion in Latin American equities at New York-based BlackRock, said he has put as much as 5 percent of his assets in stocks of Brazilian exporters and other companies that will benefit when the real trades weaker than 1.8 per dollar. Investor confidence in Brazil has deteriorated to the lowest since the 1999 devaluation because of “so many road blocks” in the currency market, said Win Thin, the global head of emerging-markets strategy at Brown Brothers.
“We have been moving into some currency-defensive stocks within Brazil given the government’s policy to keep the currency at a weaker rate,” Landers said yesterday at the Bloomberg Latin America Investing Conference in New York. “This is something we hadn’t done for a while.”
Brazil’s Bovespa has gained 9.6 percent this year, with a 38 percent advance for Embraer SA, the planemaker that sells to Air France and American Airlines. That compares with an 11 percent advance of the MSCI Emerging Market Index. The Brazilian benchmark (IBOV) lost 18 percent in 2011 as inflation accelerated to six-year high in July.
Policy makers have boosted a tax on foreign loans and bonds, raised the costs for companies to borrow abroad and levied a tariff on currency-derivative trading to mute the real, which strengthened 61 percent in the 10 years through July 2011. Finance Minister Guido Mantega has called his country’s policies an appropriate reaction to a global “currency war” as the U.S., Japan and Europe keep interest rates close to zero.
Mantega said April 3 that a real at 1.80 per dollar would be “reasonable,” fueling speculation the government is setting a target instead of allowing for a free-floating currency. The real fell 0.3 percent yesterday to 1.8856 per dollar.
“The level of frustration I sense among investors and markets with Brazil is perhaps the worst I’ve seen in a good 10 years,” said Thin, who worked at Alliance Capital Management from 1997 to 1999 before joining Mandalay Advisors from 2000 to 2007. “Over the last year or so they squandered” some of the credibility policy makers built up in the past decade, Thin said.
Bank of America Corp. cut its year-end forecast for the real on April 24, citing officials’ efforts to depreciate the currency. The real will drop to 1.92 by year-end and decline to 1.95 by 2013, compared with the previous forecast of 1.85 and 1.92 for the two periods, strategists led by David Beker wrote in a note. The median forecast of 23 analysts surveyed by Bloomberg is for the real to rise to 1.8 per dollar by Dec. 31.
The central bank’s interest-rate cuts are making Brazilian stocks more attractive, according to Audrey Kaplan, a money manager at Federated Investors Inc. She said she has boosted the portion of Brazilian stocks in her portfolio to 9.5 percent, from zero in 2011, as the central bank lowered its benchmark interest rate 3.5 percentage points since August to 9 percent.
“The environment is more favorable because interest rates are going down,” Kaplan said at the conference. “Our biggest concern is the strength of the currency.”
The central bank, led by Alexandre Tombini, said that any further reductions should be “conducted with parsimony” as rates approach the record low of 8.75 percent, according to the minutes of its April 17-18 meeting, released yesterday.
Since taking office 16 months ago, Tombini set interest rates lower than economists estimated in three out of 10 policy meetings. No central banker in the world’s top 10 economies has surprised analysts more often, according to data compiled by Bloomberg, raising concern that Brazil’s policies are becoming too unpredictable.
Lower interest rates risk fanning inflation. Consumer prices rose 5.2 percent in March from a year earlier, exceeding the mid-point of the central bank’s target of 4.5 percent plus or minus two percentage points.
Marcela Meirelles, a Latin America strategist at TCW Corp Inc., which oversees $128 billion of assets, said Brazil’s currency policy helps smooth the real’s swings. Policy makers in emerging markets are justified in adopting unconventional measures to cope with an influx of capital to avoid currency overvaluation and instability in the financial system, as interest rates in advanced economies stay low, she said.
“I am sort of in a way sympathetic to the concerns policy makers have,” Meirelles said at the Bloomberg conference yesterday. “I don’t think volatility is something that we would welcome.”
Instead of intervening in the currency market, policy makers should make reforms to help improve the competitiveness of companies to cope with a stronger real, said Landers.
“It’s unfortunate, because what they should be doing is not focusing on the currency side, but really focusing on improving the costs of doing business in Brazil so these companies could be more competitive,” said Landers.
Investment in Brazil was 20 percent of gross domestic product in 2011, about the same as in 1980, compared with 38 percent for India and 49 percent for China, according to the International Monetary Fund. It’s easier to do business in Pakistan or Albania than in Brazil, according to the World Bank’s 2012 competitiveness study, which ranked the nation No. 126 out of 183 countries.
The real is “way too strong,” and will remain “misaligned” for a while, Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said at the conference. Policy makers should foster industries in which Brazil enjoys a competitive advantage, including mining and agriculture, rather than orchestrating a weaker currency, he said.
“The biggest pitfall is that policy responses have been too concentrated on the short-term dynamics,” Ramos said.
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