Flash Note

Brazil: Senate voted in favor of Dilma Rousseff’s impeachment


Brazil's stepping stone towards economical & political progress is well underway, however challenges lie ahead...

Key Takeaways:

  • Michel Temer becomes Brazil’s acting president and Dilma temporarily steps down
  • A welcome development given the market friendly names in the new government
  • However, caution is required as a lot of challenges lie ahead and markets have already priced in most of the positives

As expected, a majority of Senators voted in favor of Dilma Rousseff’s impeachment, which means Michel Temer becomes Brazil’s acting president and Dilma temporarily steps down. This is a positive development in our view given the track record of the previous government in tackling the country’s issues, but Temer's government is facing a lot of challenges. There is also a possibility that he might not be able to push through urgently needed reforms as easily as expected (especially the de-indexation of pensions and minimum wage). Congress might do what they did to Dilma and block some of the reforms. Furthermore, the ongoing corruption investigations might add some uncertainty.

In the short run, we will probably have positive headlines from market friendly names in the government as well as some easy low-hanging fruit reforms. Combined with disinflation and lower rates, this could lead to a continuation of the positive sentiment in the short run. However, we have to be careful that after a rally of +40% in the local equity market since January and 5Y government yields going from almost 17% to 12%, the risk/reward is no longer as compelling and interesting as it was 5-6 months ago.

[Divider] [Flash Note] Bahia Bands

Our positioning

All this had prompted us to increase our allocation to Brazil earlier this year. Carmignac Emergents has a 7.1%* exposure to Brazil, in line with its reference indicator and up from 1.8% at the end of 2015.

We took a stake in CCR, a diversified industrial group with highway and other infrastructure concessions. Not only does the company have solid growth prospects, it also displays a degree of financial discipline that fully meets our standards. Its return on equity is in the vicinity of 30% this year. For that reason, CCR is a perfect fit with our investment process.

More recently, we added a position in Brazil’s leading insurer BB Seguridade, a company offering a 45% return on equity (for 2016), far above its local and global listed peers. Insurance is an underpenetrated sector in Brazil, thus offering long-term growth potential, particularly life insurance where BB Seguridade has a strong exposure.

We have also doubled our exposure to MercadoLibre, the undisputed e-commerce leader throughout Latin America, a profitable, asset-light business with a strong brand catering to one of the fastest growing ecommerce markets in the world. This online retailer has a particularly strong presence in Brazil and Argentina, where it earns respectively 50% and 25% of its profits.

* Rebased, as of 04/05/2016, including the pro-rata part of MercadoLibre (based on operating income)