For Invesco, High Yields Make Battered Brazil Too Big to Ignore

  • Looking to ‘re-engage’ in Brazil if reform push resumes
  • Turkey, South Africa may benefit from any Brazil pullback

Shunning politically-volatile Brazil makes no sense for emerging-market investors, according to Invesco Ltd.

Arnab Das

Source: Invesco Ltd.

The firm with $841 billion under management is looking to “re-engage” in Brazil after taking some profits earlier in the year, as long as momentum builds behind economic reforms, said Arnab Das, Invesco’s London-based head of emerging-market macro. Brazil’s over-sized presence in developing nations makes it unfeasible to go completely underweight despite the recession and political uncertainty that have weakened the economy, he said.

Government bonds and the currency have already trimmed much of the losses inflicted late last month when an audio recording emerged in which President Michel Temer appeared to endorse bribes to a disgraced lawmaker. With benchmark interest rates more than 10 times higher than in the U.S., liquidity robust, and a reform agenda that has so far survived the sprawling scandals, the opportunity cost of abandoning Brazil’s is too high, Das said.

Q: Which are the most fragile emerging markets?

  • Brazil’s recovery is at risk because of shocks to consumer and business confidence. The economy had been starting to recovery, the central bank was getting on top of inflation, and the political system was engaging in structural reform - including a labor market reform, a cap on fiscal spending and the most recent effort at social security reform. This last is crucial to restore long-term fiscal stability and suppress latent inflation risks.
  • Turkey is in repair mode following its coup, security challenges and declines in tourism in response to the Syrian conflict. South Africa has political challenges and growth remains relatively weak. However, as with Turkey, the yields are high and the currency is being supported by both improved commodity export prices and capital inflows.

Q: Have you changed your positioning on Brazil?

  • We are watching and waiting on Brazil. We had been optimistic that a diluted social security reform would eventually pass, but had been scaling back our exposure because we thought valuations had become stretched. So if anything, we are hoping there will be a good opportunity to re-engage with Brazil if and when the reform process resumes.
  • It requires a quite bad scenario in Brazil to drive the investor community into a large and structural underweight. Brazil is a major part of the emerging market universe and it is a high yielding part of it. So it is structurally difficult to be under-invested.

Q: Which countries can benefit from outflows from Brazil?

  • The main beneficiaries are likely to be a combination of other high-yielding but mainstream, relatively large emerging markets such as Turkey, South Africa, and other lower yielding economies that still offer a meaningful growth and yield pick up over developed markets, such as Central Europe and parts of emerging-market Asia. Such a combination would allow maintaining some liquidity to get back into Brazil if and when the politics stabilizes, without sacrificing too much return.
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