Paul McNamara: Brazil's Bond Surge Isn’t Over Even After a 66% Gain

  • Political crisis is easing, current account is improving: GAM
  • Temer has won lower-house approvel for spending-cap measure

To GAM UK Ltd.’s Paul McNamara, Brazil’s improving political and economic fortunes mean there are more gains to be had in the country’s bonds even after they soared 66 percent this year. 

He’s sticking with an overweight position on Brazil’s real-denominated notes in his Julius Baer Local Emerging Bond Fund as the government moves closer to passing spending-cap legislation and surging exports help narrow a current-account deficit. The $6 billion fund has returned 17 percent this year, besting 59 percent of its peers.

After tumbling in 2015, Brazil’s local bonds have posted the biggest surge in emerging markets this year on optimism President Michel Temer will push badly needed fiscal reforms through Congress after years of political infighting and pull the economy out of recession. Last week, he secured his most important congressional victory since taking office as the lower house overwhelmingly supported a constitutional amendment that will cap growth in public spending. Temer replaced Dilma Rousseff, who was suspended earlier this year and later impeached in late August.

“The spending-cap plan got passed, politics have improved and the balance of payments looks great,” said London-based McNamara, who manages $6.5 billion of assets. “Brazil is an upside story.”

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The country’s current account, the broadest measure of trade in goods and services, has been recovering since late 2014, following a steep currency depreciation that boosted exports and a deep recession that limited imports. In August, the shortfall narrowed more than estimated by economists to $579 million from $4.1 billion in July. It was the best performance for the month since 2007, according to the central bank. 

And while a rebound in Brazil’s real and a fledgling economic recovery may slow the improvement in the current account, the price of the country’s exports like iron-ore and soy has held steady this year, boosting trade.

Brazil’s year-to-date trade surplus has soared to $36.2 billion, the highest since the Ministry of Industry, Foreign Trade and Services began publishing the data in 1992.

“We like countries that have learned to cope with commodity prices and Brazil stands out,” McNamara said.

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