Matein Khalid
Brazil stock market performance unfortunately vindicates General Charles de Gaulle’s morose prediction “Brazil is a country of the future and always will be”. In my Wall Street salad days, we were neurologically programmed to buy Brazilian equities when crude oil/soft commodities price boomed, when the global economic growth was in acceleration mode and when a right wing pro-Uncle Sam President with close ties to the military’s deep state and the IMF held executive power.
If this rule book applied to 2021, Brazilian equities would be one of the bullish sweethearts in the Morgan Stanley emerging market index, right? Wrong, dead wrong. My favourite poison to trade Brazilian equities with minimum fuss/fee is the iShares MSCI Brazil ETF (symbol EWZ), which tracks all of my favourite names on the Bovespa index.
Yet I have been forced to go short and not long the EWZ because my political/currency risk barometers in Brazil flashed a get the hell out of here SOS since early May, despite the spectacular rise in Brent crude, coffee, meat and sugar prices. Sure enough EWZ has plunged from 42 in June to 32.80 as I write. A verse in the Bible says that man does not live by bread alone. A rule in Senhor Matteo’s investing rule book dictates that politics and currency risk are paramount in EM. I cannot put money in any emerging markets without a subliminal feel for its political constellation and its currency risk.
Brazil has been a disaster since summer because its president Jair Bolsonaro has gone, sadly, nuts or mucho loco as we put it Gringolandia. Bolsonaro has boasted that “only God can remove me from office” – a historically incorrect statement since most Brazilian Presidents have been removed from office by military juntas, impeachment and criminal convictions. In any case, Bolsonaro has lost the last shred of his credibility in the boardrooms of Wall Street and the Bretton Woods twins. Trump’s exit was a death rattle for Bolsonaro brand of neo fascist, populist politics and COVID denial.
It does not surprise me that polls suggest that former trade union leader/head of state Lulu da Silva will easily beat him in the next presidential election. The prospect of a left wing pendulum shift in Brazilian politics is obviously anathema to global investors. As if the above was not bad enough, the Brazilian real has been in free fall against the US dollar for compelling macro reasons. Inflation has risen to 9.5% and forced the central bank in Brazilia to raise the Selic rate five times to 6.25% demonstrating that it is way behind the curve.
When I first visited Rio in the early 1990’s, Brazil was in the grip of hyperinflation and President Collor had just been impeached for sniffing cocaine and other more serious crimes while in office. Brazil used to change the name of its currency more times than I owned pairs of shoes. The battle against inflation was only won after President Cardoso persuaded my ex-Wharton professor Dr. Arminio Fraga to give up his job as George Soros’s EM debt conseillere and return home to create the Real Plan.
Now the Real woes are amplified by the collapse in iron ore prices and China’s crackdown on foreign capital. So for now, I have no option but to repeat the title of one of my favourite movies I saw at Penn – Bye Bye, Brasil. Stay short EWZ, meus amigos. Obrigado.
Matein Khalid is Chief Investment Officer at Asas Capital
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