Aaron Grehan, deputy head of emerging market debt, at Aviva Investors is of a similar view, telling Portfolio Adviser that Wednesday’s news was little more than confirmation of what was already widely expected and thus entirely priced into Brazilian assets.
“Focus now moves to delivery of the expected fiscal framework. Current expectations are that Congress has the ability and willingness to push through adjustments but potential backlash is a medium term risk given the fragile backdrop.”
Temer has the keys
According to Grehan, asset prices could move higher from here assuming the external backdrop remains supportive, but he added that the market has already priced in a significant amount of the positive effect.
“The Temer government will have to continue to build a solid coalition in the Congress and move forward with the promised fiscal adjustments. Political uncertainty has not completely disappeared though with municipal elections in October and Car Wash investigations [a money laundering investigation] ongoing.”
There are others, however, who see longer term potential in the change in leadership.
Thomas Smith, manager of the Neptune Latin America Fund agrees that some of the ongoing political change within the country has been priced in, but is of the view that opportunities remain.
“It all rests on how quickly Temer can affect change. If he does not do a particularly good job there is unlikely to be much more upside, but if he can move aggressively and quickly pass some of the proposed reforms, then there is potentially a significant amount still left on the table.”
“It is no longer a contrarian play, but the market has proved already that it is prepared to reward reform stories and Brazil will be rewarded if it can successfully execute the reforms that have been proposed.”
Longer term outlook
Sophie Bosch de Hood, manager of JPMorgan Brazil Investment Trust is similarly optimistic, agreeing that the next few months are likely to be crucial.
“If inflation begins to come down, rates will start to come down, providing a positive environment for many companies. We believe that much of the recession of the past two years is down to confidence and if interim president Temer takes the right course of action, we could see confidence returning to the economy. He has indicated signs of privatization and reforms that could put Brazil on the right track.”
For those investors that believe in the long term outlook for emerging markets, the ongoing reforms in Brazil are undoubtedly encouraging, but even the most optimistic players are aware that the road ahead remains rocky and full with potholes. And, it seems, for contrarians there are other, less travelled routes that now look more appealing.
