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Brazil's stockmarket and currency have fallen sharply on concerns about a new political crisis in Latin America's largest economy

According to Matthew Vaight, Manager of M&G Global Emerging Markets, investors are worried that the revelations could lead to political turmoil and jeopardise the government’s plans to revive the Brazilian economy...

Brazil’s stockmarket and currency have fallen sharply on concerns about a new political crisis in Latin America’s largest economy. The sell-off was sparked by allegations that President Michel Temer, who replaced former president Dilma Rousseff after her impeachment last year, was involved in a bribery scandal.

Investors are worried that the revelations could lead to political turmoil and jeopardise the government’s plans to revive the Brazilian economy. At the time of writing, the president has rejected calls for his resignation and claims that an investigation will prove his innocence.

For the moment, investors are focusing on the political situation, and markets are dominated by uncertainty and speculation about what will happen next. Beyond the noise about the political upheaval, however, we believe that Brazil’s economic situation appears to be gradually improving.

After two years of recession, the country’s worst-ever downturn, the economy is expected to have grown in the first quarter of 2017. Recent employment data was encouraging, while inflation is falling. In our view, it looks like Brazil is now past the worst – the recession appears to be ending and the recovery seems under way.

There is a chance that the government’s much-needed reforms, including pension reforms, may be delayed by the crisis engulfing the nation, but we remain broadly optimistic about the future. We think the improving economy should be positive for companies, helping to boost their profits, and think valuations currently look attractive.

During the recent market falls, therefore, we have been adding selectively and modestly to our Brazilian holdings. We will look to take advantage of any further mispricing opportunities that arise where we believe the market’s worries about the political situation result in excessive share price declines.

As at the end of April 2017, the M&G Global Emerging Markets Fund had 11.1% invested in Brazil, an overweight of 3.6%, relative to the MSCI Emerging Markets Index.

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