Hedge Fund Managers Are Weighing In On Brazil’s Currency Devaluation And Political Situation

The good news, according to hedge fund manager James Dondero, is Brazil’s Congress stood behind President Dilma Rousseff’s veto of spending increases. Rousseff’s plan is to cut spending and raise taxes to fortify the budget so there won’t be another credit rating cut. Mr. James Dondero is the co-founder of Dallas-based Highland Capital Management. Highland Capital, under Dondero supervision, has more than $21 billion in assets under management, and some of those assets are in emerging markets like Brazil. Mr. Dondero has an office in Sao Paulo, so he knows first-hand what is happening to his investments as he watches the Brazil’s currency drop like a ton of bricks. Dondero says Brazilian stocks on facebook.com are also taking a beating even though the government got the Congressional vote it needed to shore-up their 2016 budget.

Mr. Dondero thinks China’s faltering economy is playing a big role in Brazil’s financial issues. China is Brazil’s top trading partner and the Chinese have drastically cut imports from Brazil and other countries. The fact that Congress agreed with President Rousseff is a positive sign for investors, but most foreign investors are in a wait and see mode at the moment, according to Dondero. If China can’t get its economic act together and import more Brazilian raw materials, the situation in Brazil could continue to erode. The Brazilian stock market fell by 2 percent, and Petrobras stock is dropping even though its offshore investments are still very profitable. Petrobras stock hit its lowest point since 2003, according to Mr. Dondero.

Hedge fund managers like Dondero have a bearish attitude about Brazil because some economists say President Rousseff’s plan to raise taxes and cutting spending could cause more economic turmoil. But Dondero and other investors are not giving up on Brazil. There are signs that the country will weather this financial storm. Brazilian companies that export most of their products are taking advantage of the four real for one dollar exchange, and business is booming. Rousseff wants to keep the value of the currency low in order to attract more export customers. If Brazil export business improves especially in the oil and steel industries, the country will show some growth in 2016.

The big challenge for investors is the China situation. Even though the Brazilian real’s value is attractive, China is not reacting to it yet. Without China, Brazil will have a hard time meeting or exceeding its export numbers and investors like Dondero know that’s going to hurt them in the short run. But Highland Capital hedge fund managers firmly believe Brazil will bounce back. History shows that Brazil always bounces back, and most hedge fund managers are staying to reap the rewards of that recovery.

Mr. Dondero believes signs of a recovery will begin to develop in 2016 if President Rousseff’s plan works and China begins to import the raw materials it desperately needs from Brazil. Brazil is still most hedge fund managers’ long-term choice even though the short-term returns will be flat, according to Dondero.