Brazil Stocks Are World’s Worst as Corruption Concern Resurfaces

  • Investors wait on interim president to fix economy’s woes
  • Bradesco slumps most on Ibovespa after report of indictment

This month marked a reversal of fortune for Brazilian stocks.

The Ibovespa was the world’s worst performer in May as investors sought signs that acting President Michel Temer could push through measures to rescue the economy even as members of his administration got caught up in the same type of political turmoil that encircled Dilma Rousseff before she was removed to face impeachment proceedings. Brazil’s stock gauge was the third-best performer in the first four months of the year on optimism the new government would shore up the budget and restore growth.

"The market faced a reality check this month," said Adeodato Volpi Netto, the head of capital markets at Eleven Financial Research in Sao Paulo. "The process of fixing the economy will be a bumpy road. I just hope that investors don’t go away."

The Ibovespa dropped 10 percent in May, its worst performance in more than a year and a half and the biggest decline among more than 90 gauges tracked worldwide by Bloomberg. It fell 1 percent to 48,471.71 Tuesday in Sao Paulo after rising as much as 0.6 percent earlier in the day. State-controlled oil producer Petroleo Brasileiro SA slumped with crude prices, and a gauge of energy stocks was the worst performer among 10 industry groups.

Lender Banco Bradesco SA contributed the most to the index’s drop after Chief Executive Officer Luiz Carlos Trabuco and two other executives were indicted by federal police over corruption and money laundering accusations for allegedly taking part in meetings aimed at canceling 3 billion reais ($831.7 million) in taxes. Bradesco said in a statement that it did not hire services provided by the company under investigation by the police and that its legal team will present the bank’s arguments.

"The news about the investigation weighs on Bradesco, for sure, but also brings uncertainty to the overall market,’’ said Fernando Goes, an analyst at Clear Corretora brokerage. “Everyday we see politicians involved in the cases, but now it’s getting to the companies as well. Nobody knows who else could be involved.’’

After contracting 3.8 percent in 2015, Brazil’s gross domestic product is forecast to shrink about the same amount this year, marking the country’s worst recession in a century. Temer replaced Rousseff on May 12 and plans to limit spending to shore up the budget and regain investors’ confidence after the country’s credit rating was cut to junk. Investors are now focused on whether lawmakers will approve the changes, according to Jason Vieira, the chief economist at Infinity Asset Management.

"The market is tense and attentive," Vieira said from Sao Paulo.

Political tension increased over the weekend after the ministry that Temer created to demonstrate his commitment to fighting corruption was caught up in the fringes of the graft investigation that has rattled Brazil’s political establishment for two years. Local press published a recording of a conversation in which Fabiano Silveira, the minister of transparency and control, criticized the probe known as Carwash and offered advice to a politician under investigation.

Silveira resigned Monday evening, becoming the second member of the new cabinet to step down in two weeks. On May 23, Budget Minister Romero Juca resigned over allegations that he wanted to obstruct the same probe.

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