Fund managers eye opportunities in shock Brazil sell-off

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A shock bribery scandal involving the Brazilian president has caused the country’s benchmark index to suffer its fastest decline since the 2008 financial crisis and the real to drop 8 per cent against the US dollar.

Fund managers say they will seek buying opportunities in the sharp market correction, as President Michel Temer’s refusal to resign puts further pressure on stocks and the currency.

Temer, whose pension and labour reforms had been viewed positively by investors, has been caught on tape encouraging a prominent executive to pay off a witness in a major corruption probe.

The revelations prompted the Bovespa stock index to close at 8.8 percent down and the real to hit 3.38 reais against the US dollar.

Fidelity Funds Latin America fund portfolio manager Angel Ortiz says the scandal is a big shock to the market, which had had a strong run over the last 16 months.

But Ortiz adds: “Such situations that lead to an indiscriminate sell-off typically result in opportunities to buy good companies at an attractive valuation.

Ortiz says he will be looking for companies with good business models, in keeping with the fund’s investment philosophy.

Claudia Calich, manager of the M&G Emerging Markets Bond fund, says structural reforms, especially the pension reform, seem to be “pretty much dead in the water now” and the uncertainty could threaten the country’s stabilisation after two years of recession.

The Brazilian fund manager says the country now faces questions over who will run its country with potential candidates for October 2018 elections each impacting the market in different ways.

“With regards to market implications – Brazil is clearly underperforming, but this will be an opportunity to buy other emerging market assets as short-term technicals are cleared – including USD shorts covered – or other credits that are uncorrelated to the Brazilian economy but are suffering in a similar fashion,” Calich says.

Rate futures indicate most bets point to the central bank cutting the benchmark rate by 125 basis points.