Brazil : Political risk is back

Just as political risk seemed confined to developed markets, Brazil sent a stark reminder yesterday that presidential upheavals are not something buried in Emerging Markets’ past.

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The country’s stocks, bonds and currency tumbled on Thursday as a new political crisis threatens to derail the government’s plans to take the country out of recession.

Brazil’s federal police carried out arrests and searches after news reports indicated that President Michel Temer approved bribes to silence a key figure in last year’s corruption scandals, which led to the impeachment and ousting of former president Dilma Rousseff. Temer has denied the allegations.

The Ibovespa stock index came to a halt after plunging 8.8% on Thursday, while the real posted its biggest loss since 1999, despite the central bank’s intervention to support the currency.

The yield of US-dollar denominated sovereign bonds surged by 56 basis points to 5.09%.

Although contagion to other Emerging Markets has been limited, the developments in Brazil warrant the experience and expertise from active managers.

Legg Mason May 2017

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