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Forget the Economy. In Anxious Brazil, It’s the Politics, Stupid

Bloomberg – August 26/08/2015

Filipe Pacheco

Gone are the days when Brazilian investment decisions were based largely on economic reports and company earnings. Now, asset managers and analysts say they’re more likely to scour the headlines of local newspapers for the latest political developments.

The market is eagerly clinging to every bit of news out of Brasilia, the nation’s capital, as President Dilma Rousseff fights for her political survival and congress is gridlocked over austerity measures needed to avert a credit-rating downgrade to junk. Reports of bills being shelved, back-door negotiations hitting road blocks and a sweeping corruption scandal drawing ever closer to Rousseff are enough to trigger swings in the real, bonds and stocks.

“I wish I had a degree in political science,” said Will Landers, a money manager who helps oversee $2.7 billion of Latin American equities at BlackRock Inc. “It’s something we have to follow more closely than the economy or finances. Every time we think things will calm down, something else comes up.”

That’s translating into a boom in business for political-advisory firms like Eurasia Group and Arko Advice. Eurasia, which has five political analysts focused on Brazil, is hiring more in Sao Paulo and New York, said Bruno Reis, a director for the company in Sao Paulo. Arko opened a London branch last year and has seen a 25 percent increase in clients in 2015, said Lucas de Aragao, a partner at the Brasilia-based company.

“We are getting tons of questions from all over the globe — from very generic doubts regarding the impact on growth to others demanding specific details about a potential impeachment process,” Aragao said from Brasilia. The complexity of Brazil’s government makes it “hard for Brazilians in Sao Paulo or Rio to understand what’s going on. For foreigners, it’s an even bigger challenge.”

On Aug. 18, the benchmark Ibovespa index swung from a 1.2 percent loss to a 0.5 percent gain after a news report that a bill to tax some company payments to shareholders had been scrapped. On Aug. 7, the real plunged 1 percent in two minutes before rebounding again amid reports Vice President Michel Temer would give up his role as Rousseff’s main coordinator in congress. And on July 16, a fresh corruption investigation into Rousseff’s predecessor, former President Luiz Inacio Lula da Silva, triggered a selloff in the real.

Boston-based Loomis Sayles & Co., which has $242 billion under management including Brazilian bonds and equities, this year hired two political-consultancy firms and a social-media monitor to scour Twitter feeds and websites for any mention of keywords like “impeachment.” Jose Tovar, chief executive officer of Rio de Janeiro-based ARX Investimentos, which oversees $11 billion in assets, said he’s also talking to political analysts on a daily basis.
“It takes a lot of creativity to analyze Brazil nowadays,” said Bianca Taylor, a Brazil sovereign analyst at Loomis Sayles. “The political scenario is the front-and-center focus.”

To be sure, the outlook for Brazil’s economy is so lousy that traders have priced in most of that bad news. The Ibovespa stock index has tumbled 52 percent in dollar terms in the past year through Wednesday and the currency has plunged 38 percent. On top of that, unemployment is at a five-year high, inflation has topped policy makers’ target range for seven straight months, and a central bank survey of economists shows Brazil is heading for its longest recession since the 1930s.

The real rose 1 percent to 3.5587 per U.S. dollar as of 12:43 p.m. in Sao Paulo.
Rebounding from the downturn hinges on Rousseff’s ability to push fiscal measures through a fractured congress.

Staying on top of every development out of Brasilia “is a lot of work,” said Reis from Eurasia. “Understanding politics has become mandatory for understanding Brazil.”