What Rio worries? Brazilian Stocks Rev Higher

Brazil’s Ibovespa equities market is up nearly 23 percent so far, with many Brazil-related investments rallying. The Brazilian component of the BRICS Building motif (representing more than 20 percent of its weight) has gained more than 23 percent in the past month, helping the motif to a 10.8 percent gain overall in this period. In that same time frame, the S&P 500 has increased 0.5 percent.

Over the last 12 months, the motif has fallen 6.5 percent; the S&P 500 is up 3.6 percent.

Uncertainties amidst political turmoil and Summer Olympics already factored into market?

In May, Brazilian President Dilma Rousseff was suspended from office to face an impeachment trial in Brazil’s Senate for allegedly mismanaging the federal budget. But this is no supposed corruption at the hands of one person. Rousseff and her allies have maintained that the probe has been the equivalent of a witch hunt amid a series of arrests and allegations involving widespread government malfeasance.

Indeed, just at the end of last week, the conservative lawmaker who led Rousseff’s ouster resigned himself as speaker of the lower house of Brazil’s Congress after mounting calls for him to step down while he faces charges of taking as much as $40 million in bribes.1

Then, of course, there are this summer’s Olympic Games, scheduled to begin next month in Rio de Janeiro, the country’s second-largest city. Opinions differ on how ready the city is – including whether construction of athletic event sites will be done on time. (Google “rio olympics disaster” and peruse any of the 221 million search results yourself).

Despite all of this, investors seem to be growing in optimism through some combination of “it can only get better” and the very real bounce-back in oil prices.

Just last Friday, the country’s stock market rose to its highest level in eight weeks as the government of Acting President Michel Temer said it planned to cut the budget deficit next year.2

Finance Minister Henrique Meirelles announced plans to reduce the nation’s budget deficit in 2017, which is seen as a big step in its strategy after the country lost its investment-grade rating last year. As a Bloomberg report noted, the Ibovespa market’s surge in 2016 has largely come on bets that the new government will succeed in regaining investor confidence by shoring up finances.

Investor confidence finding a footing
“The market feels much more confident now,” Paulo Henrique Amantea, an analyst at Guide Investimentos in Brazil, told Bloomberg. “The trend for stocks is positive.”

Nowhere has that been seen more evidently in the turnaround of Petroleo Brasileiro SA Petrobras (ADR) PBR, or Petrobras, the state-controlled oil producer that saw $20 billion of its market value wiped out over two years after being the absolute center of the widespread government corruption scandal. The company has replaced its management and is trying to reduce its $126 billion debt burden. Last Thursday, it announced it will sell bonds and use the proceeds to buy back as much as $2 billion of other debt.3

Shares of Petrobras have rallied more than 70 percent this year. The company and its investors received another boost last week as Brazil’s lower house approved a bill relieving the company of the obligation to participate in all offshore drilling.

Meanwhile, the rebound in oil prices prompted Morgan Stanley to recommended buying the stock. “Our overweight rating is driven by improved fundamentals and higher oil prices,” Morgan Stanley analysts wrote in a note last week. “Asset valuations are likely to improve in a higher oil price environment.”

The bank estimates crude prices will advance to $80 a barrel in the long term. That prediction may take longer to come about as oil has slipped toward $45 a barrel in the past few weeks. But a resumption of the uptrend could provide a sustained lift for the stocks of Brazil and other emerging-market countries.

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