The corruption scandal rocking Brazil has led observers to come up with any number of historical comparisons that, they argue, offer insight into what lies ahead.
There’s the influence-peddling scheme that forced the resignation two decades ago of President Fernando Collor de Mello. That one’s a favorite. And then there’s the 2002 election of Luiz Inacio Lula da Silva; it wasn’t a scandal, true, but it sunk Brazilian markets into a similar funk. Others have latched onto the Clean Hands graft probe that roiled Italy in the early 1990s.
To one veteran investor, though, none of these events offer the right reference point.
Monty Guild Jr. says the real precedent -- from a stock picker’s standpoint at least -- lies farther back in history: the Watergate scandal of the early 1970s.
Guild’s boutique investment firm was in its infancy back then and the crisis, which took down U.S. President Richard Nixon, was formative for him. The main takeaway? Buy stocks while they’re cheap. After sinking amid the political turmoil, the S&P 500 surged in the months after Nixon resigned in 1974, gaining 28 percent over two years as political stability returned to Washington.
“We try to buy when blood is running on the street,” said Guild, who as chief investment officer manages about $190 million in global equity funds. “This is a lot like Watergate, and after Watergate what happened? Where there’s a crisis in confidence, costs go down and there’s a huge opportunity.”
While some 40 years apart, there appear to be several similarities between the episodes. Just like the investigation into the break-in at the Watergate hotel, Brazil’s probe into kickbacks at the state oil company escalated over two years of deepening economic turmoil, eventually implicating President Dilma Rousseff.
And like the infamous tapes that led Nixon to resign, a recording of Rousseff’s conversation with her predecessor now has brought her one step closer to being impeached. Critics say the recording, obtained through a police wire tap, suggests Rousseff named Lula to her Cabinet to shield him from the probe.
Guild now predicts Brazil’s benchmark equity index will climb as much as 20 percent over the next two years while the currency could soar as much as 50 percent against the dollar. (This foreign-exchange forecast in particular is very much a minority opinion; the consensus call from analysts has the currency sinking 13 percent by 2018.)
Guild began positioning himself for a rally in February, buying shares of banks like Grupo BTG Pactual and Banco Bradesco SA. His biggest fund now has 12 percent of its money invested in Brazil, tied with Canada as the top holding.
Those investments have paid quick dividends. Growing speculation that Rousseff will be removed from office, paving the way for a government that can restore Brazil’s finances, has already sparked a 29 percent rally in dollar terms this year that’s made the Ibovespa the best-performing equity gauge in the world.