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Brazil Bull Who Got It Right in 2002 Says This Time No Different

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.”

JBS S.A. upgraded by Fitch Rating to BB+

JBS S.A. (BM&FBOVESPA: JBSS3, OTCQX: JBSAY, “JBS” or “Company”) communicates to its shareholders and to the Market in general that Fitch Ratings (“Fitch”), a rating agency, upgraded JBS S.A. from BB to BB+, with stable outlook.

According to the Fitch report, “the upgrade reflects JBS S.A.’s strong products and geographical diversification, as well as the successful integration of several acquired businesses over the past few years. It also factors in the strengthening of its business profile due to the recent acquisitions in the U.S., Europe and Australia. (…) Further, Fitch expects the company to report strong performance in all of its divisions in 2015 and 2016.”

The report also emphasized that “JBS S.A.’s ratings are supported by its strong business profile as the world’s largest beef and leather producer and its overall product diversification into poultry, beef, pork and to prepared foods.”

This upgrade underlines the Company’s commitment to operational excellence, free cash flow generation, financial discipline and value creation to its shareholders.

Fitch plays down 2-notch downgrade for Brazil

A director at Fitch Ratings on Monday played down the possibility of Brazil losing its investment-grade status during its next rating revision, saying the ratings agency “does not usually” give two-notch downgrades, barring exceptional cases.

However, Rafael Guedes, Fitch’s managing director for Brazil, said the possibility of an imminent one-notch downgrade is higher than 50 percent. He also noted that in 2002 the agency downgraded Brazil twice in the same year.

Fitch rates Brazil at BBB, two notches above junk, with a negative outlook. Competing ratings firms have already downgraded Brazil this year – Standard & Poor’s to BB-plus, in junk territory; and Moody’s Investors Service to Baa3, its lowest investment-grade rating.

Investors and even the Brazilian government expect Fitch to catch up with its peers, but the main question has been whether or not it will keep the country’s coveted investment grade.

A second downgrade to junk status is expected to have an even greater market impact than the first, as many investors are required to hold securities with investment-grade ratings from at least two ratings agencies.

Fitch representatives met with Brazilian policymakers last week in Brasilia and a decision on the country’s rating could come at any moment. Fitch has kept a negative outlook on Brazil’s ratings since April.

Guedes said Fitch’s decision will take into account the likelihood of President Dilma Rousseff getting Congress to pass the austerity measures needed to plug next year’s budget gap.

“The measures are not difficult to approve, but the government has no support in Congress,” he said in an event in Sao Paulo.

Guedes said that Brazil’s debt dynamics will not stabilize even if the government delivers a primary budget surplus of 0.7 percent of gross domestic product and the economy grows 1 percent next year. The Brazilian economy is expected to contract 1 percent in 2016.

Brazil downgrade leaves little choice but austerity for Rousseff

Brazil’s government scrambled yesterday to reassure investors it will impose austerity measures to put public finances in order after its credit rating was downgraded to junk status.

President Dilma Rousseff called an emergency cabinet meeting to brainstorm on policies to bridge a fiscal shortfall and how to win their approval by a Congress that has been reluctant to sign off on unpopular belt-tightening measures.

“The plan is to come up with something in the next couple of weeks that we can work on with Congress,” Finance Minister Joaquim Levy told journalists.

The Standard & Poor’s rating agency on Wednesday stripped Brazil of its hard-won investment grade rating, downgrading it to “junk” sooner than the government and investors had expected.

The downgrade appeared to strengthen Levy’s position. He has been the government’s face of austerity but his push for deeper spending cuts to improve Brazil’s finances and avoid a downgrade faced resistance inside the cabinet and Congress.

Read more: Unlike S&P, Fitch still sees elements supporting Brazil’s investment grade

Unlike S&P, Fitch still sees elements supporting Brazil’s investment grade

Fitch Ratings still sees elements supporting Brazil’s investment grade, a senior analyst with the ratings firm said on Thursday, easing market fears the agency could follow Standard & Poor’s decision to cut the country to junk.
Speaking at a Fitch conference in New York, analyst Shelly Shetty said that Brazil’s credit rating is deteriorating and that there is a greater than 50 percent chance it will be downgraded.
But a one-notch downgrade would still leave Brazil with investment grade, because Fitch currently has the country at BBB, or two notches above junk level, with a negative outlook.

“There are clearly elements which still buttress the investment-grade credentials,” Shetty told investors, citing Brazil’s economic diversity, per capita income levels, and the government’s net creditor position in dollars.