The Brazilian markets are poised to benefit from a change in global risk sentiment, with improved ec...
The Brazilian markets are poised to benefit from a change in global risk sentiment, with improved economic fundamentals and continued IMF support, according to Caspar Romer, who is on F&C's Latin American desk.
Large-scale economic change and the chance of the left-wing candidate winning the upcoming election are overstated, he claimed. 'Brazil has continued to act as the global market's risk barometer, with debt spreads widening from below 700 basis points in April, to a high of 1,700 basis points during the final week of June,' he added.
'This has been mirrored in a collapse in the Brazilian Real, falling from below R$2.3 to almost R$2.9, and a 30% fall in the local equity market.'
Romer is uncertain about the cause of the wild fluctuations in the Brazilian markets.
'True, the country suffers from a substantial current account and fiscal deficit ' the twin Achilles' heels that have had the markets limping since the emerging market crises of 1998,' he said. 'However, with a free floating currency, a mounting trade surplus, strong flows of foreign direct investment and almost four years of over-compliance with IMF fiscal targets, the situation has only improved over this period.'
Romer considers that the rapid rise in the polls of Lula, the left-wing candidate running for the presidency in October, may be the factor that has unsettled investors. 'However, with more than half the electorate yet to express a preference and the official campaigning season still to get underway, this may be short-lived,' said Romer. 'Instead, the single most important variable appears to be a global aversion to risk, with high risk assets from Turkey to the US junk market selling off since April. This makes predicting the future even more of an uncertainty than normal.
'The spiritual home of football has more than a fifth World Cup Trophy to celebrate, with a number of factors now going the country's way. Election campaigns are due to kick off in earnest in August and, with the government's candidate guaranteed more than double the airtime of the opposition and the backing of an increasingly popular outgoing administration, the polls are likely to improve considerably over the coming week.'
Inflation will remain easily under control, especially in comparison to historical data, and interest rates will probably drop over the next couple of months.
The continued IMF support in the form of a $10bn facility and substantial international reserves provide the country with sufficient firepower until the new administration is safely in place, said Romer.
'History has proved that when global risk sentiment turns, the market reaction from Brazil can be extremely positive and extremely powerful,' he said. 'As President Cardoso said of 30 June's win, 'when nobody expects it, he puts the ball in the goal ' that's Brazil'.'
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