Commodity Prices Trump Politics for Investors in Brazil

(Bloomberg Opinion) -- This was supposed to be Brazil’s breakout year. The deepest recession in its history ended in the second quarter of 2017 when consumer spending increased 1.4 percent after nine quarters of retreat. During the ensuing 12 months, $1.3 billion poured into Latin America’s largest economy through exchange traded funds, making it a top-10 nation among investors.

Then the money stampede stopped. By July, international funds were exiting faster than anywhere else on the globe. The biggest of them, BlackRock’s MSCI Brazil ETF, suffered its worst outflows since inception in 2000.

Much of the investment peril is attributed to the void in the October presidential election. The overwhelming favorite among several rivals with fragmented support is Luiz Inacio Lula da Silva, president from 2003 to 2011, when gross domestic product grew by an annual average of 4.1 percent and markets boomed. But Lula is a convicted felon sitting in jail and was recently barred by the Electoral Court from competing on the ballot.

Not to worry. If history provides any clue about what comes next, investors can breathe easier no matter who winds up in the Palacio da Alvorada. That’s because over four presidencies since the ’90s, both the currency and Ibovespa Brazil Sao Paulo Stock Exchange Index respond more to the rise and fall of commodity valuations than to the vagaries of politics and policy. With the prices of minerals like bauxite and agricultural products like soybeans poised to rise, whoever wins will be in the right place at the right time.

So far in this century, the Ibovespa and real have fluctuated with swings in the Bloomberg Commodity Index, which reached record highs in 2008 and trended lower since 2011, according to data compiled by Bloomberg. That helps explain why Lula’s time in office remains Brazil’s best for wealth creation: The real appreciated 113 percent against the dollar while the stock market produced a total return (income plus appreciation) that was 824 percent better than the benchmark for emerging markets, according to data compiled by Bloomberg.

None of his peers come even close to that performance. His predecessor, Fernando Henrique Cardoso, was lucky to catch a commodities rally as the 20th century was ending (he took office in 1995) and unlucky after a downturn that arrived as he was completing his second term in December 2002. As a result, investors lost 6.98 percent in stocks against the stock benchmark and 76.10 percent in the real. No candidate was perceived so favorably by investors as Cardoso, who led the polls during the six months before the election when the stock market gained 38.85 percent against the benchmark and the real strengthened 18.75 percent.

Dilma Rousseff, an economist who was Lula’s chosen successor, had the misfortune to take office after commodity prices had peaked, undermining her political agenda. The stock market lost 44.75 percent of its value against the benchmark for emerging markets between her inauguration in January 2011 and removal from office in May 2016. The real depreciated 52.33 percent during the same period, according to data compiled by Bloomberg.

Then along came Michel Temer, who benefited from six months of stock-market and currency gains on expectations that Rousseff's impeachment on charges of tampering with government accounts would result in fiscal reforms ushered in by his administration. Once he took office, the Ibovespa continued rallying with a relatively stable real until earlier this year, when it became apparent that he was a lame duck with a still-tainted government up for grabs.

The correlation between Brazil’s commodities cycles and bull and bear markets hasn’t gone unnoticed by some of the most successful investors. Alaska Investimentos Ltda, owned by billionaire Luiz Alves Paes de Barros, considers the October elections mostly irrelevant.

“We’re in total risk-on position,” said Henrique Bredda, a partner in the firm, which produced a 333 percent total return during the past three years with its Alaska Black Master FIR BDR Nivel fund. The fund beat the benchmark Ibovespa’s 66 percent and is a perennial No. 1 among its competitors since 2013, according to data compiled by Bloomberg.

During the past eight years, Alaska Black Master turned its holdings in basic materials companies from underweight the benchmark to overweight, and consumer discretionary shares from matching the benchmark to overweight, among other decisions. Alaska’s strategy is the opposite of many money managers, who consider the election the least friendly to markets in decades.

“Don’t look at the economy to try to predict Brazil stock returns,” Bredda said in an August interview at Bloomberg’s Sao Paulo office. “It’s all about commodities. We think commodities will go up a lot.”

As for who will win the election, he said: “It doesn’t matter.”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew A. Winkler is a Bloomberg Opinion columnist. He is the editor-in-chief emeritus of Bloomberg News.

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