Brazil Oh Brazil, Quo Vadis?

Dear PGM Capital blog readers

In this weekend blog article, we want to elaborate on the latest corruption scandal that hit Brazil, when on Wednesday night, May 17,  Brazilian newspaper “O Globo” reported that Joesley and Wesley Batista, respectively chairman and chief executive of JBS S.A (OTCBB: JBSAY), Brazil’s largest meatpacker, had presented a secret recording of Brazilian President Mr. Michel Temer approving bribes to Eduardo Cunha, the disgraced former speaker of the lower house, to authorities as part of plea-bargain negotiations.

QUO VADIS:

Quo Vadis is a Latin phrase meaning

“Where are you going?”

BOVESPA & BRAZILIAN REAL SELL-OFF:

As can be seen from below chart on Thursday, May 18, “Brazil’s currency, the real, fell sharply against the US-Dollar, on fears that the allegations would torpedo the government’s crucial reform programm to overhaul Brazil’s sinking public finances.

As can be seen from below chart, the Brazilian Bovespa stock index plummeting more than 10 percent on Thursday, triggering circuit breaker limits, following new bombshell allegations that the country’s president Michel Temer had discussed buying a colleague’s silence over corruption investigations.

Shares of political sensitive companies like Petrobras (NYSE: PBR) sold of sharply on Thursday as can be seen from below chart.

PGM COMMENTS & ANALYSIS:

Brazilian stocks had exploded higher in 2016 on hopes that President Temer would be able to snap Brazil out of its socialist phase, based on this the country’s stocks-index, the Bovespa, more than doubled off the lows of January 2016, as can be seen from below 2-year chart.

The dramatic drop in the Bovespa of last Thursday was enough to nearly wipe out all of the index’s gain for the year and would be its biggest one day decline since October 2008 during the global financial crisis.

The Temer government had already been struggling to maintain popular support, as the economy – contrary to the rosy assertions generally found in western media – continues to struggle.

Despite his extreme unpopularity among Brazilian voters, Temer has maintained a broad majority in Congress, but analysts said public outrage over the scandal could change the political equation.

“If the recordings are confirmed, President Temer would have to defend his mandate on multiple fronts, citing the danger of public pressure for Temer’s resignation, lawmakers’ calls for impeachment and a possible investigation by the nation’s top prosecutor.

Brazil is currently ranked at just #140th in the world in economic freedom, that’s a truly horrendous showing.

When browsing this index we see, that Brazil ranks well behind such economic paragons as China, Russia, Nigeria, and the Democratic Republic of Congo.

We believe that a country that doesn’t guarantee economic rights is likely to treat foreign capital badly sooner or later, which means that you can trade these countries, but they tend to stink as long-term investments.

Based on the above we will remain very cautious in investing in Brazil, unless we invest in Companies that are being controlled by Investment Gurus, with a track record of Good (Corporate) Governance, Transparency and that have a great market share outside Brazil.

Yours sincerely

Eric Panneflek