Brazil Magic Lost by Rousseff as $300 Billion Evaporates

By Julia Leite

Photographer: Dado Galdieri/Bloomberg

President Dilma Rousseff is seeking re-election this weekend after a first term in... Read More

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Minutes after being sworn in as president of Brazil in January 2011, Dilma Rousseff delivered an emotional inaugural address in which she proclaimed the country was at the “beginning of a new era.”
For investors, she was right for all the wrong reasons.
The Rousseff era has ushered in year after year of declines in financial markets, a stark contrast to the go-go days overseen by her predecessor and mentor, Luiz Inacio Lula da Silva, that made Brazil a market darling. She is seeking re-election this weekend after a first term in which the country’s benchmark stock index plunged 22 percent, erasing about $300 billion of market value, and the real sank 33 percent.
It’s a grim snapshot for a president who took over what Lula said in November 2010 was a country enjoying a “magical moment,” posting the fastest expansion in a quarter century and helping lead the global economy out of recession following the financial crisis. After four years of Rousseff’s intervention across the economy and a
slump in prices for Brazilian commodity exports, the country is mired in something akin to stagflation as growth weakens to the slowest pace in two decades and inflation surges.
“There’s no doubt the policy framework this government has put in place has made matters worse,” Geoffrey Dennis, the head of emerging-market strategy at UBS AG, said in a phone interview. Dennis, who’s been covering Brazilian stocks since the early 1990s, has an underweight rating on the country. “I remain highly skeptical she’ll get more market-friendly. The market is going to be in ‘show me’ mode” if Rousseff wins re-election to another four-year term, as voter polls predict.

Lula Gains

Brazil’s real and the Ibovespa were the second-worst performers in major markets during Rousseff’s first term. The underperformance comes on the heels of eight years of outsized gains under Lula.
Backed by a surge in commodities during his tenure, Lula, the founder of Brazil’s Workers Party, oversaw a 113 percent rally in the real, the best-performing emerging-market currency in the span. Stocks reached their peak in 2010 under Lula, surging six-fold in his eight years in office. It was the second best performance among major stock gauges, trailing only Hong Kong’s Hang Seng index.
Markets have slumped as recent polls showed increased support for her re-election bid. The Ibovespa has plunged 6.5 percent this week, more than double the drop in emerging-market shares. The real has lost 3 percent in the span, the worst performance among 24 developing-nation currencies.

Itau Outlook

Banco Itau BBA SA recommended yesterday in an e-mailed research report that clients go underweight on Brazilian stocks because the country “does not currently offer an attractive risk/reward balance.”
While missteps by Rousseff’s administration explain part of the poor performance, other factors outside her control also played a role, according to UBS’s Dennis. Faster global growth, led by China, pushed commodities higher during Lula’s tenure and put Brazil “on a launching pad,” he said. Rousseff faced a Chinese slowdown and the end of the commodities super cycle.
Rousseff’s popularity stems from near record low unemployment, strong wage gains and concern opposition candidates could roll back welfare programs that have helped lift 35 million Brazilians out of poverty over the past decade.

Rating Cut

Her policies have also led to above-target inflation even as Latin America’s largest economy this year entered a recession for the first time since 2009. Rousseff’s expansionary fiscal policy fueled Brazil’s first sovereign rating cut in more than a decade, while the increased role the government took in state-run companies in attempts to control inflation sapped profits at oil producer Petroleo Brasileiro SA and electric utility Centrais Eletricas Brasileiras SA.
“Her approach was still to focus more on social equality than on development and growth,” Paul Christopher, the chief international strategist at Wells Fargo Advisors, which manages $1.4 trillion, said by phone from St. Louis.
Press officials for Rousseff’s campaign, the president’s office and the Finance Ministry didn’t reply to requests for comment.
Petrobras has posted $44 billion in operational losses at its refining division since 2011 as it sells imported gasoline at a discount to help curb inflation. The oil producer, which had almost doubled in value this year as the incumbent slipped in voter surveys, could see shares return to close to 2005 lows if she is re-elected, according to Lu Yu, a money manager in San Diego at Allianz Global Investors, which oversees $511 billion in assets.

Volatility Gauge

As the Ibovespa swings with voter polls, traders have been snatching up options on Brazilian stocks, pushing a gauge of volatility on the equities to nearly double since August. The Chicago Board Options Exchange’s Brazil ETF Volatility Index, which tracks options prices on the iShares MSCI Brazil Capped exchange-traded fund, reached the highest level since November 2011 this week. It fell 0.6 percent to 43.49 yesterday.
Brazilian assets also plunged before Lula’s first term in 2002. Investors speculated he would mismanage the economy and lead the country into the biggest debt default ever. The currency reached a record low 3.9505 per U.S. dollar in Oct. 2002, while stocks fell to a three-year low at the time.

Poll Results

Rousseff would get 40 percent of votes in the first round of the election Oct. 5, while opposition candidates Marina Silva and Aecio Neves would receive 24 percent and 21 percent, according to a Datafolha poll released on Folha de S.Paulo’s website yesterday. The survey of 12,022 people had a margin of error of plus or minus 2 percentage points. A separate Ibope poll published yesterday showed Rousseff would beat Silva or Neves in an Oct. 26 runoff.
Moody’s Investors Service cut its outlook on the nation’s Baa2 rating to negative on Sept. 9, citing “the absence of any signs of a recovery.” Standard & Poor’s lowered Brazil’s rating in March to its lowest investment-grade level, with a stable outlook. Consumer confidence as measured by the Getulio Vargas Foundation fell in August to the worst since April 2009.
“All I can see is continued deterioration in the underlying economy,” John-Paul Smith, chief executive officer at Eclectic Strategy in London and a former Deutsche Bank AG strategist who has been bearish on Brazil since Jan. 2011, said by phone. “I find it difficult to look beyond that.”