As we approach kick off for the FIFA World Cup, football fans and investors alike will have eyes trained on Brazil seeking signs the country can live up to expectations, on and off the pitch. One person more than most will be hoping the Brazilian team can lift the trophy and spirits of a nation. President Dilma Rousseff’s popularity has been falling since protests last summer highlighted popular discontent with her government. With polls suggesting a second round is likely in the October elections Rousseff’s chances of winning a second term would be enhanced by a World Cup free of protests and power blackouts, while a Brazilian victory may provide the temporary boost needed to secure re-election.
Investors eye political change
Since coming to power in Brazil, Rousseff has presided over a 43 % fall in the local Bovesp index in US dollar terms. Inflation has remained stubbornly high, G DP growth looks to be stuck in a low range around 2%, and loose fiscal policy ha s prompted concerned attention from the rating agencies. But we only need to look at the rising stock markets in Mexico and India, where newly elected leaders have promised powerful reforms, to see the importance of political change for investors. Indeed, investors tired of Rousseff’s attempts to micro-manage the economy in sectors such as utilities, infrastructure and banking, have been buoyed by early polls hinting at a chance of a new president and since hitting a five-year lo w in February 20 14 the market has risen some 25%. So what should we do now?
Our exposure to Brazil in the Magna Latin American Fund has not changed. The country still represents half the portfolio but this is under weight relative to the benchmark. The upside potential is so high should we see a new market-friendly president that we have time to wait for further evidence that this will happen, relaxed about missing the early stages of a post-election rally. For now, President Rousseff is still a marginal favourite and the beginning of the media campaign will support her position.
