Brazil is Ugly, But It's in Style

04/15/2014 - 08h54

Brazil is on top in the financial market's fall collection. Even better, in the spring collection, because foreigners are much more excited than locals. The excitement of those with big money became obvious.

The dollar fell to R$ 2.20; the stock market rose from the grave, where it lay in mid-March. The money came in, but nothing changed in the beloved Motherland. Brazil is still ugly, but came back in style, to paraphrase the old hit from funk poet Tati Quebra-Barraco.

An exemplary story of this good-turning-bad is Pimco's change of opinion. Brazil would now be so cheap that investing here would give money, said Mark Kiesel, one of the vice presidents of the Californian company that manages the world's largest amount of money applied toward debt.

On Jan. 15, the president of Pimco, billionaire and finance legend Bill Gross, said that Brazil was no longer a priority and that he would pull money out of the country.

Last year, Pimco embarrassed itself in Brazil. It didn't believe that the real and the prices of government securities debt would deteriorate due to changes in US monetary policy; it ranked first in line at the default of Eike Batista's OGX.

Pimco is not even close to being a newcomer in Brazil. When the financial sector was in panic or speculated about Lula's victory in 2002, Pimco believed the turmoil would pass. It bought government debt for cheap - for half the price - because "everybody" was selling Brazilian assets in heaps; the dollar reached R$ 4.

At the time, finance hotshots like George Soros and Mark Mobius thought the government would collapse. But it didn't. Pimco gained around a billion dollars.

Last month, Kiesel and his advisors spent four days in Brazil. They spoke to government officials, investors and big companies. At the end of the trip, they asked and answered the following questions (reformulated in more human terms):

1. Are the "market bets" for the level of interest, for example, exaggerated, given the situation of the "real" economy and government accounts? Is the situation of the "fundamentals" that bad? No, it's probably better;

2. Will the "market bets" be high in comparison to the current level? Yes;

3. Will investors' feelings toward Brazil improve? Yes.

In Kiesel's summary, the market "exaggerated" its pessimism, given the medium-term prospects of the country and its defenses (many dollar reserves and low external debt). Aside from that, the atmosphere was so bad - with Dilma Rousseff down in the polls, credit at a low rate and steady protests - that the government could change.

More importantly, the interest rate in Brazil was again one of the fattest in the world, too high for a country that grows so little, Kiesel wrote.

It's good to buy government debt (lending to the government), bank stocks that improve your balances even in a weak economy (Itaú and Bradesco) and even Petrobras.

Could the turmoil return? It's unlikely, since the US monetary policy, the Fed, would now be more predictable. Moreover, high interest rates and interventions from the Central Bank of Brazil relating to exchange rates protect the country.

That's what "they" are saying.

Translated by JILL LANGLOIS

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