Brazilian markets reflect investor resilience

When Michel Temer, Brazil’s president, was recently caught on tape allegedly endorsing bribes, markets briefly went into a tailspin, as investors feared an ambitious reform programme aimed at restoring fiscal health for Latin America’s largest country was in jeopardy.

Fast-forward one month, and although Mr Temer still faces a criminal investigation and calls for his resignation, resilience defines Brazilian markets. The benchmark Bovespa equity index has for now stabilised above its lows of last month, while government bond prices and the currency have bounced.

Crucially, investors have not shut the door on the country and its reform efforts. Since the tapes became public in mid-May, roughly $1.1bn has flowed into Brazilian equities, the highest level in five years, according to data tracker EPFR.

“There is not exactly optimism; there is a feeling of investors giving the benefit of the doubt to the government, since much has been advanced in this past year,” says Zeina Latif, chief economist at XP Investments. “But the government should not rest on its laurels — markets can quickly review their positions.”

The main reasons for a sense of market insulation from the latest political tempest, analysts say, is solid external accounts. This helps protect the economy from any sudden halt in foreign financing or changes in market sentiment. Coupled with inflation falling to a decade low of 3.6 per cent, this allowed the central bank to cut interest rates at the end of May and help support market sentiment.

1. Congress votes to impeach Dilma Rousseff
2. Temer takes over as interim president
3. Senate removes Rousseff and Temer assumes presidency
4. Michel Temer audio leak sparks scandal
5. Temer survives electoral court ruling over presidential mandate

“Brazilian markets have been relatively resilient, for several reasons,” says Michael Gomez, head of emerging markets at Pimco. “We have seen a very large adjustment in the…

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