Brazil Stocks Extend 23% Rally as `Time of Opportunity' Seized

  • Newspapers report opposition has enough votes to move forward
  • Brazilian real leads losses amid $24.7 billion in swap sales

Brazilian stocks extended a rally that has pushed the benchmark Ibovespa up 23 percent this year on speculation that lawmakers will vote to impeach President Dilma Rousseff and usher in a new government that can fix the economy.

“Political change can bring about much better economic times, and certainly markets are anticipating that,” Gerardo Rodriguez, a money manager at BlackRock Inc. in New York and a former deputy finance minister for Mexico, said on Bloomberg Television. “It’s certainly a time of opportunity. We’ve been trading Brazil on the equity side so far, trying to enjoy the rally but also being careful on what is going to happen.”

The Ibovespa led gains the Americas after local newspapers’ scoreboards showed the opposition has the votes needed to pass the impeachment request in the lower house, a move that’s seen halting the quagmire that’s prevented the approval of measures to revive Latin America’s largest economy. Financial markets have rallied prospects of a more business-friendly Vice President Michel Temer taking over.

The Ibovespa climbed 1.6 percent to 53,227.74 at the close of trading Friday in Sao Paulo, bringing this week’s gain to 5.8 percent. State-controlled companies including oil producer Petroleo Brasileiro SA and Banco do Brasil SA climbed at least 3.5 percent. Brazilian dollar notes due in 2025 fell, while the cost of protecting bonds against nonpayment using five-year credit-default swaps rose for the first time in six days. The real lost 1.4 percent to 3.5321 after the central bank extended this week’s reverse swap sales in a move that’s equivalent to buying dollars in the futures market.

Investors around the world will be closely monitoring the vote in the lower house, which will be televised and scheduled to start at 2 p.m. local time Sunday. Tallies by O Globo and O Estado de S. Paulo showed that the opposition had surpassed the 342 votes necessary to move the impeachment process into the Senate. There, only a simple majority is required to remove her temporarily. Two thirds of the senators are needed to force her out of office permanently.

The political turmoil has been the main driver for Brazilian assets over the past two months, with the real showing the biggest swings among major currencies and the Ibovespa’s 60-day volatility jumping to the highest level in 15 months. While the stock measure’s valuation has been above that of its emerging-market-peers based on estimated earnings, the index is 28 percent below its peak on May 2008.

“If you look as an investor over the next five years, you’re going to wake up and find that this thing has tripled or quadrupled in value. This is a great entry point even though you might have to bear some short-term noise,” Scott Minerd, the chief investment officer for Guggenheim Partners LLC, said in an interview on Bloomberg Television. “I actually think it’s probably a buy,”

Yet on the currency market, forecasters are still projecting the real to tumble more than 10 percent to 3.96 per dollar by the end of this year as China struggles and Brazil’s economy deteriorates. In addition, the central bank has been acting to weaken the currency to prevent exports from slumping.

The monetary authority sold 88,500 reverse swaps out of 120,000 it offered on Friday, a move that’s equivalent to buying about $4.4 billion in the futures market. The total amount of reverse swap contracts sold this week was of $24.7 billion.

“The central bank acted in a flawless manner this week, working to reduce volatility and holding the currency at a reasonably good level for external accounts,” said Italo Abucater, the head of currency trading at ICAP Brasil Ctvm in Sao Paulo. “Still, today is the last day of trading before the vote Sunday, so politics should drive the trade.”

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