What's going on?
On Sunday, Brazil’s president Dilma Rousseff lost an important impeachment vote. This means that her days as Brazil’s President are likely to end soon (the ultimate decision now lies with Brazil’s senate).
What does this mean?
We reported on the massive corruption scandal involving president Rousseff, her predecessor Luiz Inacio Lula da Silva and Petrobras, the country’s largest oil company. Brazil used to be considered one of the emerging market powerhouses, but the big fall in commodity prices seriously hampered Brazil’s economy. Despite the country’s successful years, the government of Brazil had mismanaged its own finances (spending more than it was making). Eventually such behavior comes home to roost and that’s exactly what has happened over the past few years. It has consequently become extremely unpopular among investors – until recently.
Why should I care?
For stocks: Brazil’s markets have already moved a lot higher – partly on hopes that Rousseff would lose power. Stocks are up almost 25% since January and the Brazilian real is up 10% vs. the US dollar. Investors are hoping that a change of government will lead to more economically friendly leadership for Brazil – and thus a much improved economy.
The bigger picture: Emerging market stocks and bonds are having their best rally in seven years. It’s partly because the US dollar has weakened, which means that it has become easier for non-American companies to pay back US dollar debt (and emerging market companies tend to have a large amount of that). Also, higher commodity prices, driven by a rebounding China, have helped emerging markets as many, like Brazil, are big commodity producers. These factors could easily reverse, but if they continue, it could be a very good year indeed for emerging market investments.