Financial market, many people already consider the impeachment inevitable

Impeachment may be the first step towards a sustainable recovery of the economy and markets.
23/03/2016 09h15 - Updated 23/03/2016 09h15
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Financial market, many people already consider the impeachment inevitable, but say that the Bovespa is rising because of the expectation of change in power is only a half truth.

The rise in stocks this year - Bovespa rises 17% January to here - is not specific to Brazil, more than you all emerging markets. In fact, when comparing the performance of stock baskets (known as ETF) countries like Brazil, Peru, Chile and Colombia with the performance of iron ore and commodities in general, Rousseff graphics look exactly the same.

Although one or another day the headlines coming out of Brasilia and Curitiba determine the direction of the Bovespa, This is not (still) the 'impeachment rally' - the moving forces here are even bigger than the Lava Jato and popular mobilization that is electrifying Brazilian politics.

In general, the stock markets are going through a classic 'short covering' - a high that happens when investors who rented and sold shares, betting on the fall, They are forced to buy them simply because they do not stop rising.

O problem, for those who bet against, consensus is that both the year, suddenly, They began to crumble: pessimism with China was replaced by a moderate optimism, e or dollar, everyone thought unbeatable, He began to show an unexpected weakness, mainly because the Fed has pushed back the high interest.

In January, the narrative climax 'the world over', some commodities came to negotiate the 30% its marginal cost of production. It was this panic that eventually created the basis for recovery, almost as strong as the previous crash, which is still going on. Oil has risen 34% the minimum and iron ore, 48%.

But the impeachment does have a role - although supporting - this recent high, and a motive, let say, emotional: the fear of some big investors to stay behind, and not the naive hope that Brazil change from night to day (with or without Dilma).

In the last years, global managers have dealt with significant political changes in at least three countries: Indonesia, India and Argentina. In all, the stock market and the exchange rate rose sharply, even before the actual power exchange, and a professional manager who has lost these three movements is, very likely, looking for another job.

With this in mind, international investors end up buying the Bovespa just in case. This is the simplest answer to the question "what the gringos see that we're not seeing?”

Leveraging this effect, "Brazil is very different from Argentina or Turkey,"Says a manager. "We are a big country in terms of weight in global indices. Argentina is a 'frontier market', that even today part of most international indices. If a smaller emerging these 'bomb' for some reason and you lose the high, this is not a problem, but if you lose a movement of those in Brazil ... "

Encouraging international investors, there is also the so-called 'local bias' - the idea, common among gringos, that local investors are always more pessimistic than the outsider. The thesis is that, as the locals follow the news on the Lava jet in detail, they see each tree, but end up losing the forest.
While the local bias exists, the 'gringo bias' is also a fact. Investors looking at Brazil from New York or London often do not notice certain nuances, "Such as the fact that, no Brasil, Congress is very strong, and we have an almost parliamentary constitution. "

That, as we know, It works for good and for evil - and leads us to the following question: "What the gringos do not see what we see?”

With all his faults, when compared to other emerging Brazil is more protected from a bad government - we have a weak presidentialism, a free press and an independent judiciary, and the fragmentation of parties obliges us to form coalition governments. That's why, even if some insist this comparison, not become an Argentina or Venezuela. On the other hand, this institutional rigidity prevents economic reform are quick.

"People out there are finding that the changes here will be as fast as they were in Argentina, India and Indonesia, but will not,"Says a local manager. "The country here is more democratic than any of these, and the new government will have to grate enough. "

In other countries, presidents have more power: with a number of decrees, Mauricio Macri could change a lot in Argentina in just a few weeks. The idea that the PMDB will take the place of the PT and, of a sudden, the reform agenda will take off tends to be more twisted than a dispassionate analysis.

"The local investor note these differences,"Says a Brazilian who manages an international fund. "He knows that things are more complicated than they seem. The gringo has no idea who is Temer. For them, He is the vice president who was not implicated in the scandal and is hoping to replace Rousseff. They do not know that he was quoted in Lava jet. "

In Argentine, Bolsa rose 144% (in dollars) in the three years leading up to the election Macri. but there, the future was highly predictable: Cristina Kirchner would end its mandate and, whoever his replacement, the country was ready for a fresh start. The investor did not have to follow anything, only searches.

"On here, will leave Rousseff and get a guy who has already been quoted in Lava Jato. What will be the reaction of the political system to the impeachment and the president Temer? The Macri has a popularity of 70% ... The Temer will have 70%?” (The question is rhetorical.)

This attitude has led the vast majority of the funds 'long only' Brazilian (those who bet only in high shares) to surrender unless the Bovespa index this year. Local managers do not buy the impeachment as a panacea, maintain high cash levels and refuse to buy state, which have been reprecificadas with the prospect of change in government.

The Bovespa is now at the same level of October 2014 (51 thousand points), when the market attributed 50% Chance of Aécio Neves elected (that is, the price embutia 50% chance of a president who would make structural reforms with the clout of an election victory). Today, many consultants attach a probability 70% the impeachment, but it does not know exactly how it elapse.

Besides that, from 2014 Here, public accounts worsened alarmingly. The gross debt / GDP, which was 57% that year already late, should reach 66% this year and hit 72% in 2017. (no Mexico, it's from 44%, and Argentina, 40%). The situation is serious, but the mandate to unpopular reforms in Michel Temer government-cap still have to be built by the company.

Despite its cathartic power for many citizens and investors, impeachment is only the first step towards a sustainable recovery of the economy and markets, and a party on Avenida Paulista not necessarily authorize another on the Stock Exchange.


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