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Brazil’s troubles hit equity funds

Political and fiscal turmoil has sent Brazil-focused funds into negative territory, data from FE Analytics shows.

Looking at three-year performance, all equity funds with significant exposure to Brazil were in negative territory, and the best of the worst returned -28.90%.

The funds were impacted by Standard & Poor’s ratings, which stripped Brazil of its investment grade status by downgrading the country to junk territory.

A second ratings agency, Fitch, said last week that it downgraded Brazil to “BBB-“ with a negative outlook on the country’s “continued economic underperformance, increased macroeconomic imbalances, deteriorating fiscal accounts and a material increase in government debt”.

President Dilma Rouseff’s government has been trying to get a package of austerity measures passed in the National Congress for months. However, low approval ratings for her government amid a corruption scandal at state-controlled oil giant Petrobras have weakened the president’s influence. The opposition has also filed a petition to impeach her.

Standard Life Investments noted earlier this month that Brazil is experiencing a deep recession due to its own policy mistakes and missteps. Jeremy Lawson, SLI’s chief economist, said: “A widespread, systemic emerging markets financial crisis is unlikely, given the institutional progress made over the past two decades.

“However, crises cannot be ruled out in those countries with large imbalances, like Brazil, Malaysia, South Africa or Turkey.”

Babson Capital Management said this week that while it sees opportunities in the emerging markets and expects continued strong issuance in the fourth quarter, its allocations to Brazil will be reduced due to the ongoing corruption investigations and political uncertainty.

“Given these headwinds, we believe selectivity and a focus on credit analysis are critical to investing in the asset class,” the firm noted.

Bonds are different, however. Politics and the Petrobras scandal will create more short-term turmoil in Brazil, Sonja Laud, head of multi-asset income at Baring AM, told FSA in a previous interview.

Yet government bonds pay 15% on a 2-year bond. “If you assume the government will not default, that’s a pretty decent return on short-term paper,” she said.


The top performing Brazil-focused equity funds over the trailing three years:

  *Source: FE Analytics. Data for the trailing three years for funds with at least 50% exposure to Brazil


Part of the Mark Allen Group.