Brazil is in a very binary situation right now and that’s bringing huge volatility. Brazil’s current crisis is a fiscal one. That’s what caused the huge drop up until 2015. The labor party added a lot to the social networking in its 12 years in power and did not do the reforms the country needs, most notably, the pension plan reform. Pension plan deficit represents already 2.8% of the GDP, without change and with an aging population, this number will be unsustainable in as soon as 5 years. The labor party did have its merits in the beginning by taking a lot of Brazilians out extreme poverty but the lack of political power and will to make the reforms, coupled with huge corruption, erased most of its merits. So, comes 2016 and everything changes? Stock market and currency jumps and interest rates go down. The economy must have improved, right? Wrong! The only thing that improved was the expectation. With the rumors and subsequent consolidation of Dilma’s impeachment, the new president, Temer, who has in congress support what he lacks in popularity, was doing all the necessary reforms to the economy. The GDP has not improved yet, but the perspective is great and the price is right.
Then, comes corruption again and now it implicates Michel Temer. Stocks go down 10% and currency another 7%
Short after, markets start to recover thinking that, with or without Temer, the government base in the congress will be the same and the reforms will happen.
Then the binary dilemma: economy will continue to improve if these reforms pass and that seems to be the scenario both with the current president or with one replaced by the congress. In Brazil, if a president and vice president are impeached after two years in power, the replacement is chosen by the congress until the next election. However, there’s strong popular movement and even a proposed constitutional amendment to do direct elections right now and not wait until 2018. If that happens, you could see the labor party or other extremist come up strong and drop the stock market and currency further.
So, will this “diretas já” movement happen? It’s possible. The country is in big disbelief with the political representatives and not without reason. The curious part is that the direct election is what would be the most harmful to the economy and therefore, the population.
Bottom line: if you are looking at the long term: more than 5 years, this is probably a good time to buy. But in the next two years, except a lot of volatility or just remain neutral altogether (my position right now). If you are looking for hedge, you can consider BZQ, an ETF that seeks daily results that correspond to twice (200%) the inverse of the MSCI Brazil Index