Brazilian Stocks, Bonds, Real Rally Amid Meirelles Speculation

Is It Time to Bet on Brazil's Turnaround?
  • Former central bank chief seen as choice for Finance Ministry
  • Bradesco, Itau, Petrobras contribute most to Ibovespa's gain

Brazil’s stocks, bonds and the real climbed on bets that Henrique Meirelles, who led the central bank at a time of faster growth, slower inflation and a market rally, would become finance minister if President Dilma Rousseff is ousted.

The Ibovespa posted the biggest gain among the world’s major equity markets after Brazil’s Vice President Michel Temer told O Globo newspaper that Meirelles would become his finance chief should a Rousseff impeachment occur. Lenders Banco Bradesco SA and Itau Unibanco Holding SA contributed the most to the gauge’s increase. The real also climbed as the central bank refrained from intervening to weaken the currency for a second day. Brazil’s dollar bonds due in 2025 extended this year’s surge.

Traders have piled into Brazilian assets on speculation that a change in the administration would thwart the political quagmire that’s prevented the approval of measures to stimulate Latin America’s largest economy. Stocks, bonds and the real extended gains amid bets that Meirelles would have political strength to win approval for bills that have stalled in Congress. Folha de S.Paulo reported Sunday that he’d be open to assuming the post only if he has final say over appointments to a Temer’s economic team.

‘Orthodox Name’

“Brazil needs an orthodox name at the Finance Ministry with a proven track record and the ability of implementing fiscal reforms,” said Marcelo Mello, who helps oversee 19 billion reais ($5.4 billion) as the chief executive officer of SulAmerica Investimentos in Sao Paulo. “There’s no room for a new face now.”

Brazilian stocks surged sixfold during Meirelles’ eight-year tenure in the central bank, led by retailer Lojas Renner SA, steelmaker Cia. Siderurgica Nacional SA and state-controlled lender Banco do Brasil SA. During the same period, the real posted the biggest advance among the world’s major currencies. Meirelles was the nation’s longest-serving bank chief, having cut inflation and interest rates by more than half since taking office alongside former President Luiz Inacio Lula da Silva in 2003.

“In the past decade, Meirelles was able to tame inflation and cut interest rates,” said Adeodato Volpi Netto, the head of capital markets at Eleven Financial Research, in Sao Paulo. "His job in 2016 would be different. Still, if he is able to choose the other members of the economic team, the negotiation of the policies would run smoothly.”

Stock Valuation

The Ibovespa gained 2.4 percent to 53,082.50 on Tuesday in Sao Paulo, halting a three-day slide. This year’s rally sent its valuation to 13.4 times estimated earnings, or 15 percent above the multiple for the MSCI Emerging Markets Index, according to data compiled by Bloomberg. Itau and Bradesco climbed more than 3.4 percent while oil producer Petroleo Brasileiro SA followed a rally in crude.

Brazilian assets sold off last year and Rousseff’s popularity suffered amid soaring inflation, an unprecedented corruption scandal and a collapse in commodity prices. During her five-year tenure, the country’s deficit surged to the biggest in two decades and cost the nation its investment-grade rating.

The Senate took its first major step forward in the impeachment process Monday by electing members of a committee that will recommend whether to oust Rousseff, reinforcing a timetable that could see her impeachement as early as May 12. Critics say she ran finances into the ground and broke the law by trying to fill the budget gap by delaying payments to state-run banks at a time when the economy faces its worst recession in a century. The administration says the president’s actions were legal and that Temer’s allies are using them as an excuse to force her from office.

Reverse Swaps

The real gained 0.8 percent to 3.5295 per dollar, extending its surge this year to 12 percent, as the central bank refrained from selling reverse swaps that have the same effect as buying the U.S. currency. Beginning March 21, policy makers re-introduced the program created in 2005 to prevent the real’s appreciation from curtailing Brazilian exports, and have since sold $34 billion in those contracts.

“There is a clear tendency for the real to gain in the short term, with optimism in the political front,” said Joao Paulo de Gracia Correa, the head of foreign currency at brokerage SLW in Curitiba, Brazil. “Since the central bank did not announce new auctions, we should continue to see the currency strengthening. If the real gets closer to the 3.5 per dollar level, it could announce new auctions.”

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