Brazil's latest political risks tolerable for bargain-hunting investors

By Dion Rabouin

(Reuters) - A 5 percent drop in Brazil's real currency and similar decline in the Bovespa stock index (BVSP) since Donald Trump's surprise victory in last month's U.S. presidential election have created a buying opportunity in some Brazilian assets, say a number of emerging market fund managers.

The perception that valuations have grown tempting has many investors adding to their holdings even in the face of a widening graft probe within the government. Among the politicians who could be ensnared are President Michel Temer, a primary force behind crucial proposed spending and deficit reforms, and Senate leader Renan Calheiros, essentially the country's acting vice president.

Given that the rally in Brazilian assets that began in March was set off by reports then-President Dilma Rousseff's days in office were numbered, investors could be excused for again focusing on political risk in Latin America's largest economy.

But some fund managers say the buying opportunity presented by the post-Trump rout outweighs the steady drumbeat of political risk.

Ryan Caldwell, chief investment officer at Chiron Investment Management, has been increasing holdings of Brazilian banks and telecoms including Itau Unibanco Holding SA (SA:ITUB4) and Telefonica (MC:TEF) Brasil SA (SA:VIVT4). Rather than trying to position ahead of risk events like the U.S. election or Britain's surprise vote to leave the European Union, Caldwell says he has been looking to pick up the pieces afterward.

"We are really allergic to macro-forecasting and event projection," he said. "We’ve been adding a bit to our positions in Brazil" since the U.S. election.

HSBC's head of emerging markets debt, Nishant Upadhyay, said that with the selloff that followed the U.S. election coming on the heels of Brazil's worst-ever economic recession, it increasingly looks like the market has bottomed out.

"For an economy that has contracted 7 percent over the course of two years, you are going back towards a stabilizing economy and the economy has cheapened up so much you should expect positive returns going forward," he said.

Upadhyay said Brazilian quasi-sovereigns - a category that includes debt in state-controlled entities like oil company Petrobras (SA:PETR4) - are among his holdings, as are agribusiness companies' bonds. He declined to name individual securities in his portfolio.

He is also betting on the Brazilian real and would add to his holdings if the currency weakened further in the next year. He cautioned he expects significant volatility in Brazil's economy and the real even more than in many of the country's commodity-dependent emerging market peers.

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Not every investor is willing to overlook Brazil's still rocky political climate.

Wells Fargo's head global market strategist, Paul Christopher, said recent political disruptions have compounded his fears about Brazil.

"There’s still a lot of political bad feeling and it’s still possible you could see (politicians) brought up on charges that are murky or gray," he said. "That could continue for a while."

Atul Lele, chief investment strategist at Deltec International Group, who only recently closed out a short position on the iShares MSCI Brazil Capped ETF (P:EWZ), said he is now shorting iron ore miner Vale (SA:VALE5) and is watching the country's political developments very closely.

Still, many are betting that the recent dip in Brazilian asset prices is an opportunity not to be missed.

Pointing to the country's crackdown on corruption, improving commodities prices and the central bank's recent interest rate cuts, Jamie Anderson, managing principal of Tierra Funds' Latin America Real Estate ETF, said he sees Brazil in a "secular bull market."