Fund managers have warned against reading too much into a sharp influx of global capital into Latin American securities, until the political shockwaves roiling Brazil start to ebb.
Foreign portfolio flows into Latin America totalled $13.4bn in March, of which $2bn was channelled into Brazilian equities, according to the Institute of International Finance.
The net capital inflow into the region was $828m in March, the largest single monthly gain since March 2012, according to EPFR.
But fund managers said investors were misguided, noting that a sharp rally in Brazilian stocks — the BM&F Bovespa index gained 11.4% in the first quarter, paring back last year’s losses — was based on the hope that Brazil’s president Dilma Rousseff would be quickly and painlessly replaced by a reformist leader.
Peter Taylor, a senior investment manager on Aberdeen Asset Management’s global emerging markets equity team, said the reality was that Rousseff’s impeachment — which seems more likely by the day — will be a “drawn-out process. Looking at the short-term, we feel the market has got ahead of itself.”
Chris Palmer, founder of emerging market-focused fund manager Benson Avenue Capital, said the political situation in Brazil was the “biggest challenge in the way of Latin American portfolio inflows.
“Local investors are spooked about the political unrest — there is so much uncertainty they don’t know what to do. Foreign investors have evolved this belief that ‘any change is good’. It’s an ‘Arab Spring’ approach to investing where any kind of catalyst is seen as being great for Brazil.”
Simon Quijano-Evans, head of emerging markets research at Commerzbank, said last month’s rally was the result of investors “making a bet on political change” and hoping to time their return to the market following four volatile years of falling share prices.
“A lot of the ‘hope’ is priced in. There’s so much noise and hype and uncertainty surrounding Brazil. It’s a risky bet right now to expose yourself to domestic securities.”
Capital Economics tips Brazil’s economy to shrink 3.5% this year, having contracted 3.8% in 2015. Total regional ECM issuance slipped to just $463m in the year to April 6, against $972m a year ago, and $4.39bn in 2014, according to Dealogic.
Experts expect things to get worse before they get better. “We are not bullish on Latin America at all,” said Wim-Hein Pals, head of emerging markets equities at international asset manager Robeco. “The uncertainty clouding Brazil will remain until the situation with Rousseff is sorted out, and she will be there for at least the next couple of quarters.”
Benson Avenue’s Palmer added: “The returns aren’t high enough in Brazil given the risks you face. We are going to start to see airlines reporting bad numbers, shopping malls reporting bad pass-through numbers. That hasn’t played out yet. Markets are in denial that a quick fix at the presidential level will sort all this out and create a fast turnaround, and it just isn’t going to.”