The selloff punishing Brazilian markets in recent months isn’t fazing Jerome Booth. He’s seen it before and says just like then, it’s way overdone.Yes, Brazil has serious problems. The country’s “a mess,” he says, with a massive corruption investigation at state-run oil company Petroleo Brasileiro SA, a worsening fiscal outlook, the steepest recession in 25 years and a political system so fractured that needed reforms just aren’t getting done. That’s not to mention a credit-rating cut to junk and the currency’s plummet to a record low.
But there’s no chance the government is going to default, and politicians eventually will find the will to push through measures to shore up the budget and restore growth, Booth said in an interview in New York. The panic among investors is excessive, just like 13 years ago when bond prices collapsed along with the currency amid concern the front-runner in presidential elections would repudiate the government’s debt, said Booth. He was then head of research for Ashmore Investment Management, at the time one of the biggest dedicated emerging-market sovereign bond holders.
“You’ve got the classic ‘everything’s as bad as it can possibly be’” situation, said Booth, the chairman of New Sparta Asset Management, an investment company he started after leaving Ashmore in 2013. “But it’s all priced in now.”
Brazil’s overseas bonds are close to reaching bottom, according to Booth, after losing investors 8.3 percent this year. Only Zambia has posted worse returns among more than 60 emerging-market countries tracked by JPMorgan Chase & Co. indexes. Brazil’s currency, which gained 0.7 percent Monday as of 2:03 p.m. in New York, is still down 32 percent against the dollar this year, the most among major emerging markets.
After three sovereign rating cuts in the past three months, one of which cost Brazil its investment-grade rating, the government will put a “proper economic program” in place and restore investor confidence, Booth said.
“I would think it’s months rather than a year,” he predicted.
What makes Booth confident even as shops from BlackRock Inc. to Federated Investors Inc. and RBC Capital Markets see reasons to avoid Brazil?
Because he thinks most investors have overestimated the risk, just like in 2002. Back then, a selloff hit ahead of the presidential election as Luiz Inacio Lula da Silva gained in the polls. The concern was that the former union leader and founder of the Workers’ Party would declare Brazil’s debt illegitimate. Observers worried the country was slipping backward just a decade after shaking off a legacy of hyperinflation and political instability to become one of the world’s brightest stars among developing nations.
The real plunged to a record low, average yields on the country’s bonds soared to more than 25 percent and the benchmark stock gauge tumbled 40 percent ahead of the vote.
“The hedge funds at that point had this view that there’s a thing called a self-fulfilling prophecy,” Booth said. “They knew one thing: If all their peers in New York were negative,” then Brazil “would fall over. I thought that was just nonsense.”
In fact, when Lula won, investors were rewarded. From his inauguration at the start of 2003 until he left office at the end of 2010, Brazil’s dollar-denominated bonds returned 256 percent, more than double the emerging-market average. Real-denominated notes advanced 520 percent in dollar terms, almost three times the average for peers. The currency more than doubled in value against the dollar, and stocks surged 500 percent.
While Booth had money at stake when he made his call in 2002, this time around he’s not investing in Brazil’s markets. After leaving Ashmore in May 2013, he established London-based New Sparta, through which he manages investments in U.K. phone company New Call Telecom and a magazine publisher, among other businesses. New Sparta funded the Drew Barrymore comedy “Miss You Already,” which premiered at the Toronto International Film Festival last month.
Still, from his vantage point, Booth says investors are too worried about developing countries. Emerging-market assets have dropped for most of this year amid concerns the Federal Reserve will raise rates and as the Chinese economy shows signs of deceleration.
“1998 was the last time when you had a systemic crisis which could have led to serial defaults over emerging markets,” Booth said. “We haven’t had that, and we’re not likely to have that again.”
Leave a Reply