- Ibovespa index has returned 23% this year, beating local bonds
- Brazil’s Senate voted to suspend Rousseff on Thursday
In the run-up to the impeachment of Dilma Rousseff, piling into Brazil’s stock market has proved more lucrative than snapping up the nation’s bonds. After her temporary suspension from office Thursday, that may no longer be the case.
Real-denominated government bonds will return 12 percent in local-currency terms over the next year, slightly outperforming the benchmark Ibovespa equity index, according to risk premium data compiled by Bloomberg. So far this year, the stock gauge has gained 23 percent, topping the 22 percent return in sovereign debt.
While the deepest recession in a century will dim the earnings prospects of Brazilian companies, bonds may have more room to gain as acting President Michel Temer seeks to restore the government’s finances and quell inflation, said Pablo Jaque Sahr, an investment manager at AGF Security SA, which has $3 billion of assets under management. On Thursday, Temer appointed Henrique Meirelles, a former central bank chief and Wall Street banker, to head his economic team, a move that helped pare losses in the currency. Of the 51 countries tracked by Bloomberg, Brazil is the only one in which bonds are expected to perform better than stocks in the next 12 months.
“When we do a close analysis of risk-return, it certainly seems much more interesting to go into local fixed-income Brazil than equities,” Sahr said. “And we do not think this will change in the short term.”
AGF Security’s $104.6 million fixed-income Brazil fund has gained 32 percent in 2016, the most among 879 peers tracked by Bloomberg. The real weakened 0.7 percent on Friday to 3.5072 per dollar as of 11:27 a.m. in New York.
On Thursday, the Senate voted to suspend Rousseff, who is accused of doctoring budget results. She must now step down and stand trial in the Senate, a process that could wrap up by September. Temer, 75, had been Rousseff’s vice president.
Rousseff pledged to use all legal instruments in her defense, reiterating that she committed no crime and that the impeachment process amounted to a coup that is a threat to democracy.
“Credit will hold up better than equities,” Ilya Feygin, a strategist at WallachBeth Capital LLC, said from New York. “The probability of actual default is quite low. On the other hand, a period of weak growth, poor earnings, and political instability is highly likely, which does not favor equities.”