Don't Bet on a Swift Brazil Fix
There's an old market adage: buy the rumor, sell the news. Investors in Brazil have been doing the opposite. As protesters occupy Avenida Paulista in Sao Paulo to demand the impeachment of President Dilma Rousseff, global bond and stock buyers have piled into the country and are ready to double down. A few weeks ago, the political crisis had them selling.
An impeachment process is likely to be protracted, however, and even with the protests, whether Rousseff finishes her term remains a coin-toss. There are three ways the president could lose her post, which is what international investors seem to be hoping for. The only quick one is a resignation, something Rousseff has repeatedly said won't happen.
Lawmakers on Thursday revived the impeachment process, which had been stalled for months, by forming a committee to recommend whether the lower house should vote to remove Rousseff from office. The committee has 15 sessions (and Lower House committees don't necessarily meet every weekday) to hear Rousseff's defense and reach a conclusion. Lawmakers loyal to the government are likely to delay that process, perhaps for months. The people who closed Avenida Paulista may have headed home by then.
The third route is less political but no faster. The country's supreme electoral court is investigating whether graft money was used in Rousseff's 2014 election. The court started its probe last year; the Rousseff administration denies any wrongdoing. Similar inquiries involving mayors and governors took more than a year, on average.
By the time the judicial or impeachment processes run their course, the protests may have dwindled, and plot twists along the way may generate headlines indicating that Rousseff will finish her term. They might hit the benchmark Bovespa index and the real.
Brazil isn't necessarily cheap. The forward price-earnings ratio of the Bovespa is 14.1 times, almost one standard deviation higher than the five-year average of 11.9 times. The real recently approached its 55-week moving average, a key resistance level that has been breached -- for short periods -- very few times in the past five years.
Investors are motivated to catch rallies early. Rushing into Brazil in the hope that popular anger will translate into political change may be more akin to catching a falling knife.
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