Lots of talk today on Brazil and a potential move to the right with the (all white and all male) Michael Temer government moving into place.  What's clear is that the market locally has enjoyed the political change and maneuvering and hope of a new fiscal backdrop.

The Bovespa has rallied 45% in 75 sessions off the bottom on Jan 20th. Some of this has been a rebound in the EM asset class, some of this has been a bounce in iron ore and oil prices.  But a lot of the move has been the expected impeachment and now suspension of the heavy left and alleged corrupt government of Dilma Rousseff.  We have been watching the "impeachment trade in Brazil for at least 18 months.  Now what?  As I like to say and will say over and over until I die, the best time to make money in EM is when things go from "terrible" to "simply bad".   Brazil is now simply bad.

For traders the next piece isn't as easy.  Brazil is hardly dirt cheap on valuation (12.8x) and despite paying a nice div yield of 3.5% Brazilian companies are not growing earnings.  Currency stability will help and could in fact stage a significant turnaround in EPS.   Levels on the Ibovespa Index now sit back to a mid range level that has defined the mean for the last decade.  Brazil trades at the same level it did in the glory days of the market when Oil was priced at $80/bbl and Iron Ore  closer to $100/tonne than todays $68 tonne.  At this point there is a lot of hope and promise regarding the Temer government.

Big Bounce. Now what?

Big Bounce. Now what?

Temer who hails from the centrist Brazilian Democratic Movement party – was at one point Rousseff’s ally and his party formed a powerful coalition that seemed quite united...that is until Rousseff became vulnerable.  It seems pretty clear that the Temer has been planning for this moment for some time and market players have also seen how the time was right for radical change in Brazil.

Temer's new government has an enormous amount of work ahead of them to bring the economy back to a place of growth.  Fiscal policy will be crucial and Brazil is not ready socially for a radical move to the right even if this makes sense after a failed left-wing government exposed the problems with heavy social commitments without the funding of commodity revenues.  Clearly Temer is focused on the economy.   “It is essential to rebuild the credibility of the country abroad to attract new investments and get the economy growing again,” he said.

As you look for opportunities to invest in the post-Dilma world its worth looking past those names that have already rallied 30-120% in the last three months and focus on parts of the economy that are more defensive but have been un-investable because of the former administration.

What investors should focus on is where can a new government truly execute on fiscal policy and where can the new government take pressure off beleaguered sectors like Utilities, Telco and Banking.  Investing in Brazil before Dilma included a path of predictable cash flows to investors in these sectors.  In the last five to seven years, Utilities and Telcos have been largely taken off the list of safe allocations as the government changed the taxation and operating rules daily.  The Brazilian ADR market is littered with former blue chip names that should now form the basis of a "post-Dilma watchlist".  Utilities to track include:  EBR Electrobras (EBR) , Cemig (CIG), Copel( ELP).  In the Telco sector both cellular and fixed line are worth a review and the highest quality operators are Vivo (VIV) and Tim Participacoes (TSU).


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