Brazil: New President, New Corruption Scandal

There has been a lot of media hype over emerging-market stocks outperforming U.S. stocks this year. And rightly so. The fact is, emerging market stocks as a whole are outperforming U.S. stocks by more than 2.5 times.

You read that right: The iShares MSCI Emerging Markets Index Fund (EEM) is up over 17% this year. Compare that to the S&P 500 Index’s return of 7%.

But when it comes to investing in stocks of emerging economies, the rewards can by bountiful. However, the losses can be quick and painful.

Case-in-point: Brazil.

Brazilian stocks are down a whopping 8.8%, since news broke of another corruption scandal within the Brazilian government. That’s the equivalent of the Dow falling 1,840 points over a four-day span.

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Painful? You bet. But Brazil certainly is no stranger to corruption among government officials.

Many Brazilians have gotten used to seeing massive corruption investigations involving their high-ranking government officials.

But many were shocked at the news that broke last week about a secret audio recording. Joesley Batista, an executive from the JBS meatpacking giant, allegedly recorded President Michel Temer condoning the payment of hush money to a jailed lawmaker.

President Temer has denied any missteps, saying the recording was not proof of any wrongdoing. And he did not report the vague references to bribery of officials because he did not believe them.

To make matters worse for Temer, the recording was made during an after-hours visit by Batista to Temer’s office. This — by law — should have been logged. But it was kept off the books.

President Temer is facing growing calls for his resignation amid the scandal. But he will not step down, even if he is formally indicted by the Supreme Court, he said in an interview earlier this week.

The Supreme Court has now opened an investigation into the revelations that were part of plea bargain testimony by the billionaire owners of the meatpacking giant.

The court is expected to decide this week whether to suspend the investigation at Temer’s request until it can be determined if the recording had been doctored. Not likely, in my opinion.

Also this week, the council of Brazil’s Order of Lawyers (OAB) voted 25-to-1 in favor of an impeachment hearing for President Temer. This would mark the second impeachment of a Brazilian president within a year-and-a-half.

The bottom line: This new scandal could set off fears that Brazil will slide back into the political and economic turmoil that rattled the country just two years ago. This could keep downward pressure on Brazilian stocks for some time to come.

Remember, all investments come with certain risks. But when investing in emerging markets, you need to be extra careful and diligent when evaluating those risks.

To gain exposure to emerging markets, but also limiting individual country risk, take a look at the iShares MSCI Emerging Markets Index Fund (EEM), which invests in companies across many countries and regions throughout the world.

Good investing,

Mike Burnick

P.S. Will this be the END of the Republican Party? Could this shocking event give Democrats control of Congress and the White House for the next 100 years? Read more here …

Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.