Market Insider

Political upheaval bullish for Brazilian stocks

Brazil's President Dilma Rousseff attends a news conference at the Planalto Palace in Brasilia, Brazil, March 16, 2016.
Adriano Machado | Reuters

Bullishness for Brazil has only increased, now that it appears more likely that President Dilma Rousseff will be ousted.

The Brazilian Bovespa stock index is up 19 percent this year, making it the best performing stock market in the world. Brazil's real, the worst performing currency in 2015, is up nearly 10 percent this year.

Brazil is battling its worst economic recession in 25 years, and investors are betting that an impeachment of Rousseff will change Brazil's trajectory.

On Tuesday, a key political development suggested to many that Rousseff's impeachment could happen in 2016. Brazil's largest political party, the Brazilian Democratic Movement party, which played a key role in getting Rousseff re-elected, voted to break away from her government. While yesterday's vote was not unexpected, Eurasia Group research analyst Cameron Combs says the speed at which it happened was very surprising. "The vote took only three minutes," said Combs.

Demonstrators protest against Brazilian President Dilma Rousseff and the ruling Workers Party in Sao Paulo, Brazil.
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Brazil's former president, Luiz Inacio Lula da Silva (L) walks with President Dilma Rousseff as he is sworn in as the new chief of staff in the Planalto Palace on March 17, 2016 in Brasilia, Brazil.
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Political experts say this vote dramatically increases the odds of Rousseff's being impeached by the lower house in late April or early May, which would force Rousseff to step down temporarily.

Analysts at Citi wrote in a note Tuesday that her failure to get Luiz Inacio Lula da Silva, Rousseff's predecessor, appointed as a minister, and the impressive size of the street protests in Brazil, have increased the possibility of Rousseff's not finishing her term.

But Citi writes that odds of an impeachment are about 70 percent.

Still, what seemed impossible a year ago now seems like a plausible scenario, especially if Rousseff's situation worsens. The embattled president is already dealing with street protests, a string of corruption allegations and an impeachment proceeding around her handling of the country's budget finances. The scandal around state oil company Petrobras is also not helping Rousseff, who allegedly knew of the web of corruption and bribery surrounding the company but did nothing to stop it.

Thousands of demonstrators protest against Brazilian President Dilma Rousseff on March 13, 2016
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While Rousseff's departure sounds like the optimal scenario, as it would breathe fresh air into Brazil's political structure and potentially improve sentiment and confidence among citizens and investors, a few Brazil watchers caution that any political change will take some time.

"This impeachment process will not go as quickly or cleanly as markets seem to be pricing in," said Win Thin, head of Emerging Market Currency Strategy at Brown Brothers Harriman.

"There is no way Rousseff and Lula will go quietly. Plus, the new president will inherit a lot of baggage left over from Rousseff," said Thin.

Read More Brazil's Lula sworn in over protests as Rousseff faces impeachment

If Rousseff were to be impeached by the lower house in April, Vice President Michel Temer would take the presidential seat temporarily. Rousseff would still need to be formally impeached, a process that could take up to a year. Temer, who is also the leader of the Democratic Movement Party, is already said to be detailing an extensive plan if he were to take over as president of Brazil.

As we wait for the possible impeachment proceedings and vote in April, Brazil experts will be keeping an eye on the other four centrist parties to see how they will react to the Democratic Movement Party's decision to abandon Rousseff.

"A formal decision is unlikely, but any signs that they are effectively abandoning the administration will be telling," said Combs. "Centrist parties do not want to be on the losing side of this story."