Remember Brazil’s P1 Covid-19 variant that sent the country back into lockdown? Things are calming down now. Brazil is a “buy at the sound of cannons”. In fact, you may even be a few weeks late.
As investor Fernando Pertini says in his above Tweet last week, which he pointed out to me in a private conversation, the commodity bull is always good for Brazil.
“I am long EWZ and see it as well-positioned at the intersection of the inevitable end of Covid and a bout of reflationary dollar weakness as a result of a Liberal spend-a-Rama Fed,” says Brian McCarthy, head of Macrolens, an investment research firm in Stamford, Connecticut.
Spenda-a-Rama means rich bulge bracket banks like Goldman Sachs
The iShares MSCI Brazil
I like this chart because I have been selling all my old Petrobras positions (of which I have many still) and buying them back in a wash sale at $8 and change. This is a $5 to $12 stock. That’s the range this thing travels in. I now have enough Petrobras to sink a battleship.
Brazil’s Bovespa Index has not yet reached its January-level high of 125,077 points. To see how investors see the future, open interest in the options market is as good a crystal ball as any the market has to offer.
Open Interest is data published daily by the stock exchanges about the number of open contracts due on a certain date. In the case of options, these are called the “expiration dates.”
How are “the sharks” in Sao Paulo positioned for Brazil as it slow-walks out of its pandemic nightmare?
“There are a lot more calls than puts in each strike above the strike of 119.000 points on the Bovespa Index,” says options specialist Daniel Coelho Barbosa of Vandermart Solutions. Calls are options that give you the right to buy a security at a certain price and puts give you the right to sell a security at a certain price. In this particular case, it’s options of the Bovespa Index.
“We see that there are many big players (Bovespa options are expensive) that have huge amounts of calls sold naked,” says Barbosa. “Naked” is when you believe the option price will never be met. “It’s free money if the Bovespa never gets there because the calls will soon expire in May,” he says, meaning investors there believe they are buying on a discount and that’s good for long investors who believe the Brazilian stock market will pull even farther ahead in June.
In fact, looking at the same data for June, call options above the 120,000 point break are the most popular.
You can see option interest for the Bovespa Index here.
According to EPFR Global, in the week ending April 30, Brazil equity funds extended their longest outflow streak since the height of the pandemic’s first wave last March. The region’s largest economy is wrestling with the pandemic, which has killed nearly 400,000 people, an inflation rate at a six-year high and a weak president.
As far as the “Brazilian Fed” goes, their central bank says it will pursue only a “partial” adjustment in monetary stimulus in the coming months, with the focus on rising inflation.
The market expects interest rates to remain at stimulatory levels until year end. And then next year will see higher rates. Still, if Brazil is climbing out of the pandemic by then, and if the commodity cycle is still strong, there is nothing but wind at Brazil’s back.
Bolsonaro in the Gutter, But No ‘Pink Wave’
Jair Bolsonaro, the so-called Tropical Trump, is in worse shape than Trump ever was. His approval rating started the month of April in the 30s. Some 60% disapprove, according to pollsters Poder360.
This month just started, but last month started off like this for Bolsonaro, as TS Lombard analyst Elizabeth Johnson highlights:
- Resignation of the commanders of all three branches of the armed forces highlights tepid support for Bolsonaro among members of the military, his base;
- A cabinet reshuffle put the spotlight on Bolsonaro’s political weakness, so he has had to cede more power to the Congress, which are centrists by the way
He is up for re-election next year. Ex-con and ex-president Luiz Inacio Lula da Silva is — potentially — breathing down his neck. Could he run and win? Personally, I think Brazil is over Lula and the fact that he has had to go on a world tour to sell himself to the liberal media in Europe on how fit he is tells me that he is desperate for press, and desperate for relevance. If he is not getting it in spades in his own domestic press, then he knows he can get it from the British and the French media who still think it’s 2002 in Brazil.
This is not to say that Bolsonaro has struggled through the pandemic. Like Trump, he caught Covid-19 and survived it. And like Trump, he also distrusts his national press, which has been using a “death by a thousand cuts” strategy on Bolsonaro since he got elected. After rifling through three pro-Wuhan style lockdown Health Ministers, Bolsonaro — suffice to say — did not trust what he was hearing or reading about the pandemic and was soft in his fight against it.
“In a country where the informal economy is colossal, where there are more than 70 million workers living in precarious situations and without proper social protection, anger has risen against Bolsonaro’s downplaying of Covid,” says French journalist and editor-in-chief at aleurs Actuelles, Virginie Jacoberger-Lavoue. She recently wrote a book about Bolsonaro.
“Bolsonaro knows what awaits him in 2022. He will have to confront the dead of Covid-19 to convince people to vote for him,” she says. “He will have a hard time escaping from that.”
The unknown is where people will be a year from now, or even six months from now. There is just no way that the majority of Brazilians are fine with lockdowns and restrictions after millions of them have already contracted the virus and survived it.
Moreover, Brazil has probably moved on from Lula, Bolsonaro’s most visible threat, but surely not the only one.
I don’t see anyone from the far left of Lula’s Workers’ Party coming forward as a new voice to lead a “pink wave” in Brazil (and Latin America). Nor do I see anyone from the marginal PSOL party, a favorite of the globe trotting left-wing media and arts influencers in Brazil.
It’s too early to game that out and I am definitely not watching Brazil’s politics closely anymore. Right now, the market is looking for Covid to pass, not Bolsonaro.
If Brazil comes out of the pandemic once and for all at any point this year, then lockdowns and other restrictions end and Brazil surely does better than any other nation in Latin America except for maybe Mexico. EWZ will surely catch up to the iShares MSCI Mexico fund, no doubt about it.
Over the weekend, Bolsonaro fans took to the streets of Rio de Janeiro, Sao Paulo, and Brasilia. The media complained that no one was in masks, but that goes without saying.
I also suspect the U.S. will also send extra Pfizer and Moderna vaccines to Brazil at some point in the near future, probably during our early summer months. Whether or not Brazilians take them is another story, but any headline of the sort would drive markets higher.
As a Brazil investor, I cannot tell from here if Bolsonaro’s weekend crowds were bigger, smaller or the same as they were when he swept into power. Bolsonaro will need sustained numbers like that next year. More important than Bolsonaro, Brazil will need to move on from Covid-19 sooner rather than later. It does not have the resources to keep its economy in second gear for long.