Brazil’s President Temer was accused this week of bribery.The stock market fell 10% on Thursday and the Real sank 7% vs the dollar after the news.
After two years of recession, it appeared that Brazil’s economy was finally turning the corner amidst hopes of Temer’s pro-business, pro-budget reforms to post a modest growth of ~0.5% this year. But this crisis seems to have put a question mark on Brazil’s recovery.
Reforms, growth take a back seat
If Temer is acquitted, stability could possibly be restored but it would still be difficult to maintain a strong enough coalition to pass reforms. And if the accusations turn out to be true, irrespective of Temer’s resignation or impeachment, it would be a while before procedural formalities are fulfilled, new President (acceptable to all parties) is elected and reforms process restarted. In either scenario, there would be a lag to the restoration of the reforms process. Lost recovery time will add to Brazil’s fiscal woes.
Treading the stock market amidst the turmoil
Irrespective of the situation, there are always investment opportunities. For domestic investors, the drop would provide a good entry point to buy quality companies, that can withstand the upheaval. While export-led companies could benefit from the fall in real, bank and consumer staples stocks might suffer from Brazil’s hazy growth prospects. For international investors, it is best to be cautious about stocks of companies with significant exposure to Brazil / Latin America. Some of these include Whirlpool(WHR), Monsanto (MON), Avon(AVP), and Colgate-Palmolive (CL)
Read more about Brazil’s stock market here