Political Wrangling Won’t Hurt Brazilian Market
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Three years ago, investors in Brazil sold stocks when the left-winger Inacio Lula de Silva looked set to clinch the presidency. But since he turned out to be a model of fiscal discipline and economic orthodoxy after his victory, helping to underpin economic growth of 5% last year, investors now get jittery when he seems to be in trouble.
Witness last week: the market slid as the government come under mounting pressure after it emerged that his party had funded its election campaign from illicit offshore accounts. Lula’s campaign manager resigned a few days ago, having admitted to dodgy dealings, and there have now been calls for Lula to be impeached.
The key question is whether the government’s policies are likely to be blown off course. The market actually finished last week in the black after the government looked set to present new plans to cut spending. Lula remains unblemished by the allegations, and he is unlikely to revert to populism to shore up support in the polls, as there is no public appetite for such a move, says Urban Larson of Baring Asset Management.
Morgan Stanley’s Mario Epelbaum also sees little danger of Brazil deviating from its economic policies for now. So the market is hardly a write-off, especially since the fundamentals remain good. The market is on a p/e of just nine, while industrial production, employment and incomes all posted healthy annual increases in June; and with inflation under 7%, an interest-rate cut is in the offing. That’s especially good news for banks, which have been raking it in amid robust domestic consumption. One stock to consider is Banco Bradesco (BBD, $41 in New York). Merrill Lynch rates it a buy
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