EMERGING MARKETS: Brazil’s risk premium ‘is shrinking’

Brazil's reforms are beginning to gain investors’ trust; some strategists say the country’s stocks are more attractive

Investors are ready to put more money to work in the Brazilian stock market in the wake of a series of investor-friendly moves by the Brazilian government, according to market observers.

President Dilma Rousseff has held a series of meetings with business leaders, raised the price of gasoline by 6.6% on March 6 – a move that helped oil major Petrobras – and has embarked on an international infrastructure roadshow that emphasizes the private sector.

Government rapprochement with the private sector comes after a series of policies seen as hostile to minority shareholders. Last September, the government intervened in the energy sector, pushing companies to give up contracts early and causing share prices across the sector and in telecoms to drop by as much as 70%.

“Things are getting better and the Brazil risk premium is shrinking,” Alexander Gorra, senior strategist and head of international platform at BNY Mellon in São Paulo, said. David Ross, managing director at fund manager Chevy Chase, added that “the government has shown that it is aware of its credibility gap and is working to improve.”

Recent moves have boosted shares of some companies, with Petrobras’ stock up 14% in the month to Wednesday. “The diesel price issue is small but it shows that the government is moving petrol prices in line with the market. It won’t happen overnight but was a positive surprise,” said Gorra.

He is positive on stocks where the government has a role, such as utilities and concessions for toll roads and ports. “The sector has stabilized. The government is aware how badly the market reacted to its intervention in energy contracts,” he said. The government is now offering better-than-expected indemnity to energy companies affected by September’s contract renegotiations.

But not everything is going right. Mining giant Vale continues to perform poorly as the government works on plans to increase mining royalties, possibly from 2% to 4%. Doubts over the final rules, bickering between states and a new regulatory regime are yet to be thrashed out. “CEO [Murilo Ferreira] and government officials are saying different things, causing lots of uncertainty,” said Gorra.

Optimism has been tempered by prospects of another rate tightening cycle in Brazil, with the central bank showing more concern about inflationary trends. That could pull money out of equities and back into fixed-income, for long the backbone of Brazilian investments. Gorra predicted rates could hit 8.75% by year-end.

But Ross pointed out that for many investors, the tightening is seen as positive in the long-term despite the immediate issues. “More orthodox and more predictable policies from the central bank are a positive for markets. It eliminates unpredictability and gives confidence that the central bank is really independent from the government. These are exactly the kind of policies we would favour,” he said.

About admin

I've been researching and writing on Brazilian financial markets, industry and economy since 2006 for a wide range of specialist media, consultancies and investors. Before that I spent over 10 years in London and New York writing for and editing magazines and journals dedicated to finance, investment and economics in developing markets, mostly for the Euromoney Institutional Investor group and Thomson Financial. Areas of coverage Below are samples of areas that I cover and some of the common themes that I investigate. Capital markets BM&FBovespa markets *capital raising trends: via equities (IPOs and secondary issuance), debt and loans *the asset management industry: legislation and coverage of the key hedge, pension and investment funds * corporate governance: how the regulator is seeking to strengthen best practice and limitations * debt markets: the nascent corporate markets, attempts to boost liquidity and new insturments. * private equity market: why this market has been so successful, who’s involved. *electronic, high frequency trading and alternative trading platforms: what does the future hold? Banking *credit: the growth of consumer and business credit and competition between banks and models *Public versus private: the role and market share of public and private sector banks and the politicization of the industry * internationalization: which Brazilian banks are expanding overseas and where * investment banking: the growth of the domestic market and who’s winning which mandates *regional banks and development banks: what role they play in the industry and how they compete Mining *licensing: the complex process of obtaining environmental, water, land and operating licenses at a state and federal level. * capacity: the feasibility and sustainability of capacity increases * financing: how miners are raising finance in Brazil and abroad *competition: the interplay Vale, MMX and junior miners *logistics: rail, road and port connections Oil and gas: the fund raising issues related to the massive of pre-salt (link) Multilatinas: Who are they and how and where they are expanding Meatpacking: Are debt burdens sustainable, what are the different business models for areas such as branding and distrbution Agriculture: How are farms consolidating, what are environmental risks, how can foreign investors be involved. IT and software: Can Brazil take on India and build a viable long-term IT industry? For more information on clients and work, please see the media and consultancy sections.
This entry was posted in Articles, Emerging Markets. Bookmark the permalink.

Leave a Reply