The Political Crisis Isn't Stopping Brazil Bulls

  • U.S.-traded Brazil ETF gets new deposits amid market meltdown
  • Morgan Stanley, BNP Paribas reiterate their bullish views

What a New Political Crisis Means for Brazil

A day after plummeting share prices triggered circuit breakers on Brazil’s main exchange, investors are already looking beyond the political crisis and returning to Latin America’s biggest economy.

The Lyxor Brazil Exchange Traded Fund, which tracks the Ibovespa, rose the most since Jan. 3 in Paris. The U.S.-traded iShares MSCI Brazil Capped ETF, with assets of almost $5 billion, received its first inflows since April 3 on Thursday, data compiled by Bloomberg show. Money managers from Morgan Stanley to BNP Paribas SA say the market slide isn’t changing their bullish view on the country.

Investors are wagering that Thursday’s slump in Brazilian assets was overdone and the risk of a constitutional crisis overstated, according to William Jackson, an emerging-markets economist at Capital Economics Ltd. They see little chance that a changing of the guard in government would impede the main factors of the rally in the past 16 months, such as an improving economic outlook, lower borrowing costs and labor-market reforms, he said.

“People are thinking that it may be premature to abandon Brazil,” Jackson said on phone from London. “While the events yesterday came as quite a shock, there’s also the view that they may not have much impact on the economic outlook or the reform agenda.”

Morgan Stanley said it remains “constructive” on Brazil because of an improvement in the country’s external accounts and the central bank’s ability to minimize disorderly moves. While volatility may continue in the markets, any slide in the real would be unsustainable, according to analysts including Gordian Kemen and Dara Blume.

The “political noise” around President Michel Temer wouldn’t alter BNP Paribas Investment Partners’ view on Brazil. Even if he were to be replaced, the transfer of power would be orderly, according to Jean-Charles Sambor, deputy head of emerging-market fixed-income in London.

Market Meltdown

Trading on the Ibovespa briefly came to a halt Thursday, with the gauge sinking the most since 2008, and the real posted its biggest slide since 1999 even after the central bank intervened to support the currency. The premium investors demand to own the nation’s sovereign bonds rather than U.S. Treasuries jumped the most since June 2013. The declines came after O Globo newspaper reported on leaked testimony indicating that Temer approved payoffs to buy the silence of Eduardo Cunha, the former speaker and mastermind behind last year’s ouster of Dilma Rousseff.

Before the latest political ructions, Brazil had been a stand-out performer in emerging markets since January 2016. Its stock market gave investors the world’s best U.S. dollar returns last year and had clocked up gains of 17 percent before the crisis. Options traders were also turning bullish on the real, sending its one-month implied yield to a 14-month low on Tuesday. The nation’s hard-currency sovereign bonds were the best performers among major emerging-market peers this year.

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