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Brazil's risk premium 'is shrinking'

By John Rumsey
15 Mar 2013

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.

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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.


- Like every year, Emerging Markets daily newspaper covers the Inter-American Development Bank’s annual meeting, held in Panama in mid-March. Pick up your copy at the meeting, read the news on our website and follow us on twitter @emrgingmarkets

By John Rumsey
15 Mar 2013
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