Investors like James Dondero, the managing director and founder of Highland Capital Management knows that foreign investments have a lot of risks attached to them. James Dondero on nexpointadvisors has been dealing with high-risk investments for 30 years, and he doesn’t like them very much. But when countries like Brazil and China offer the kind of returns they offer for bond investments they are hard to ignore. Dondero has extensive knowledge of the Brazil situation and his company, Highland Capital Management have done a lot of research into the current situation in Brazil for their investors. The prognosis in the short-term is not good, but Highland Capital thinks long-term investments in Brazil will pay off for a couple of reasons.
One reason some investors like James Dondero and Highland Capital will stay the course in Brazil is Brazil’s financial history. Brazil is the largest exporter of ethanol in the world and the country exports sugar, coffee, soy, oil and other natural resources that are used by many countries around the world, according to Highland Capital. But investors have several concerns at the moment. One is the inflation rate. Another is the political situation and the third one is another downgrade of Brazil’s credit rating by other agencies. If that happens, Highland Capital says investors will be forced to dump Brazilian bonds.
The government under the leadership of President Dilma Rousseff says the financial policy strategy is moving in the right direction. The Central Bank is keeping the interest rate the same at the moment, and that will help bring the 9.5 percent inflation rate down to 4.5 percent next year, according to the Central Bank. Brazil’s Central Bank has already injected money into the economy to shore up the financial structure of the country. But Highland Capital thinks the Brazilian bank will be forced to raise interest rates because of Standard and Poor’s junk credit rating. That downgrade weakened the country’s currency and undermined the government’s budget forecast. The government recently announced budget cuts to closed the shortfall in the 2016 budget, but Highland Capital thinks those cuts will have a hard time passing through Congress.
The decision to cut Brazil’s credit rating to junk instead of investment grade made some investors pull out of the Brazilian market. According to Highland Capital, the risks in Brazil are too great for some investors, but other investors have no choice but ride out the financial and political mayhem.
Highland Capital’s James Dondero says the Central Bank should keep the interest rate where it is, and some bank executives think he’s right. A bank spokesman said the current monetary policy is line with curbing inflation. That announcement made swap rates that are maturing in 2017 jump nine points recently.
Some investors think the lawmakers will not approve the spending cuts and tax increases, and that will help their current investment strategy in Brazil. Fitch and Moody’s rated Brazil’s debt investment grade and that is good news. But some traders are betting that the bank will raise the interest rate to 15 percent, according to swap rates.