Brazil’s Asset Managers See Light at End of Economic Crisis

Don’t break out the champagne just yet, but Brazil’s long-suffering investment managers are starting to feel better about the future.

The suspension in May of President Dilma Rousseff for alleged budget manipulation and the appointment of a high-powered economic team by interim President Michel Temer have raised hopes that the country’s long economic and political nightmare is drawing to a close. Most analysts expect the Senate will convict Rousseff in an impeachment trial later this year, confirming the political transition, but it may take time for today’s optimism to revive investment flows in a big way and lift markets.

A fiscal binge turned bust, the collapse of commodities prices and the deepening scandal over massive kickbacks at state-owned Petróleo Brasileiro have dealt a harsh blow to the country. The economy is in its third year of recession; Banco Central do Brasil has nearly doubled its policy rate over the past three years, to 14.25 percent, to contain an inflationary spiral; the real plunged by more than 50 percent against the dollar between 2012 and 2015, and the benchmark Ibovespa stock index lost 45 percent from peak to trough. “Everywhere you looked you only saw pessimism,” says Marc Forster, head of the Brazil office of Western Asset Management Co., a Pasadena, California–­based outfit.

Temer’s naming of former central banker Henrique Meirelles as Finance minister and economist Ilan Goldfajn as central bank governor has bolstered confidence. Meirelles has vowed to rein in a budget deficit approaching 10 percent of gross domestic product, and Temer is seeking congressional approval to impose a ten-year, inflation-adjusted freeze on government spending. Goldfajn has pledged to get inflation, now 9.3 percent, down to the BCB’s target of 4.5 percent.

Although optimism is growing, investors want to see tangible progress on those goals and make sure the new government won’t be derailed by the so-called Car Wash kickback scandal, which has already forced two members of Temer’s cabinet to resign. “We are seeing some light at the end of the tunnel,” says Allan Hadid, COO of global asset management at BTG Pactual Asset Management in São Paulo. “We have the right doctors. They have the right diagnosis. The problem is the medicine takes time to take effect.”

Twelve of the firms in the Brazil 20, Institutional Investor’s ranking of the country’s largest investment managers, saw their assets decline in dollar terms in the 12 months ended March 31, in large part reflecting the real’s 10.4 percent decline during that period. For some firms, though, the underlying business is surprisingly robust.

Demand for high-yielding fixed-­income paper and a flight by some investors to larger firms has fueled growth at Itaú Unibanco Asset Management, says Fernando Beyruti, co-head of the São Paulo–based outfit. It ranks second in the Brazil 20 with $138 billion of assets, up 8 percent for the year.

The firm has had net inflows of $3 billion from retail investors so far in 2016, mainly into simple products such as tax-advantaged government bonds, he adds. International clients are starting to look at Brazil again; the hope is that fiscal progress will convince them to commit money. “We are very optimistic about our business here,” says Beyruti.

BTG Pactual suffered heavy outflows after its founder, chairman and chief executive, André Esteves, was arrested in connection with Petrobras scandal in November. Esteves, who resigned at the time, returned to the firm as a senior partner following his release by the Supreme Court in April, and investors have begun to return as well, says Hadid. The BTG Pactual GEMM global macro hedge fund saw its assets plunge from nearly $5 billion to just $170 million, but it recovered to some $450 million in mid-June. Hadid credits a steadfast approach. “We paid out all redemptions and all requests for funds — we didn’t side-pocket,” he explains. “Slowly, clients will come back and realize nothing happened. We have been here for the last 20 years. We will still be here.”

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