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How Brazil’s Scandals Are Affecting Its Stock Markets

August 2 2016

In Brazil, home to the biggest stock bull market in the world, it is ironically companies that have been tainted by corruption scandals that are leading the stock market rally.

While the benchmark Ibovespa is up 25 percent this year, a weighted Bloomberg index of 10 companies entangled in the nation’s many graft investigations — call it Brazil’s bad-boys index — has gained 41 percent. Furthermore, it’s outperforming

What’s driving the rally for many of the stocks is the exact same thing that was seen as a negative factor in years past: Brazil’s government. Suspended President Dilma Rousseff’s administration was criticised by investors for strong-arming Eletrobras into cutting electricity prices and using Petrobras as a policy tool. As a new administration takes over while she faces an impeachment trial, investors have sent the benchmark Ibovespa index to the world’s biggest gains this year for major equity gauges, betting that corporate governance will improve and the worst of the revelations have now come to light.

“Those shares were hit very hard last year, opening room for speculative traders to take advantage of their liquidity,” said Adeodato Volpi Netto, the head of capital markets at Eleven Financial Research in Sao Paulo. Still, governance is a top focus for investors, and the stocks could turn into big losers again if it looks like things aren’t improving, he said.

It’s been more than two years since Petrobras, as the oil company is known, was pulled into the sweeping corruption scandal known as Carwash, and the stock is still down 22 percent in that time, even after a 59 percent rally this year. Another member, investment bank Grupo BTG Pactual, whose founder Andre Esteves was jailed last November for allegedly obstructing the Petrobras probe, has also rebounded this year but is still down about 45 percent since the arrest.

But for every stock in the index that took a hit is a company whose involvement in probes barely seems to have registered with investors. Banco Bradesco SA, Brazil’s second-biggest bank by market value, is up 11 percent since its chief executive and two other executives were accused of wrongdoing in May by federal police in an investigation into tax fraud. Steelmaker Gerdau SA has surged 76 percent since it was pulled into the same probe in February. And Eletrobras, whose former head of nuclear power was accused in July 2015 of taking kickbacks from builders, has almost tripled since then.

Bloomberg

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