Julius Baer | Argentina is back on the radar in the fixed-income space. We upgraded our issuer rating to Buy. This could be the blueprint for every economic restructuring in emerging markets for decades to come. We hope the speed and efficiency in transforming the economy will be held up by the Macri government. If so, both Argentina and investors will benefit big time in the years ahead. Any chances of Brazil becoming the next Argentina anytime soon? Not yet. But new elections and a shift in leadership could open similar dynamics in 2017.
There may be some similarities one can draw between Argentina and Brazil, be it the slide in the currency, corruption scandals or politics. With the Macri government in Argentina coming to power, the macro outlook has brightened. The same is needed in Brazil but first we need to face reality. With Sunday’s positive vote in the lower house the impeachment process is authorised to move on to the Senate. In the Senate a simple majority is needed, most likely in May, to try Rousseff. She will then have to step down for up to 180 days for legislators to arrive at a final conclusion. In the meantime, vice President Temer will take over and form a government. The question is whether Temer will be the leader with the mandate needed to put Brazil back on track. He as well will have to deal with a high number of coalition partners with ideological differences and will have to share power.
In the meantime the headwinds remain the same: Brazil is still trapped in a deep recession, the budget deficit is enormous, distrust of politicians is deep-seated and the corruption scandal is far from over. In addition, Rousseff has not given in yet and may challenge any final decision in court.
Since we assigned our underweight rating in October 2014, the MSCI Brazil is still down 35%, even after the recent strong re- bound. We do not jump on the bandwagon and recommend investors stay underweight the MSCI Brazil. First, we do not believe in a smooth political transition; second, the market is way ahead of valuations and third, we already now try to prepare for the next weakness in emerging markets. First, the deleveraging process in emerging markets is still in full swing and commodities’ supply/demand picture is still negative. Second, with global equity markets having stabilised, the US Federal Reserve is likely to become more hawkish again, leading to a stronger US dollar and weaker emerging markets.