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What's next for investors in Brazil's impeachment scandal

Opponents of President Dilma Rousseff celebrate after the Lower House of Congress voted to proceed with her impeachment in Brasilia April 17, 2016.
Adriano Machado | Reuters
Opponents of President Dilma Rousseff celebrate after the Lower House of Congress voted to proceed with her impeachment in Brasilia April 17, 2016.

Brazil's lower house of parliament voted to push forward with Dilma Rousseff's impeachment proceedings — a crucial step that will likely lead to the embattled president getting ousted before the end of the year.

The vote now moves to the Senate, where lawmakers will decide by simple majority whether to conduct a trial against Rousseff, an economist turned president. The result of that vote, expected within weeks, is seen as likely resulting in Rousseff stepping down at least temporarily.

Some market players say the actual change in leadership is enough to make the country, currently in its worst recession in 25 years, an intriguing place to invest. Brazil boasts the world's seventh-largest economy, its fifth-largest population and is a charter member of the so-called "BRICs" club of emerging markets.

If Rousseff steps down, the baton is immediately passed to Vice President Michel Temer.

"Temer will absolutely be better than Rousseff. Brazilians prefer uncertainty to complete disaster," said Edwin Gutierrez, head of Emerging Market Sovereign Debt at Aberdeen Asset Management.

While the global financial community has fallen out of love with Rousseff, it is still unclear whether Temer will be able to capture the hearts of investors. Here's why: Temer and his Brazilian Democratic Movement Party (PMDB) are closely linked to the inaccurate accounting practices in which Rousseff allegedly participated, and have loose ties to the Petrobas scandal as well.

"We should see a proactive central bank cut rates by 300-500 basis points over the next two years." -Edwin Gutierrez, head of emerging market sovereign debt, Aberdeen Group

"Of course, financial market 'bulls' favor an 'ouster' scenario. And we, too, think that a successful ouster could take (the number of Brazilian reals to the dollar) to 3.30, simply because it will raise the probability that a new (permanent) administration pursues more orthodox and technocratic policies," the financial services firm Macquarie wrote to investors Monday morning.

The U.S. dollar gained 1.2 percent on the real Monday, rising to 3.57.

Shares of the Sao Paulo Bovespa Index were up only marginally on Monday. A note from research firm Capital Economics pointed out that the impeachment "has been building for months," and indeed, shares of the index are up almost 23 percent so far this year. Brazil stocks are also driven in large part by commodity prices, and oil was sharply lower Monday.

Many Brazil-watchers are under the impression that Temer will sit in for Rousseff but won't run in the 2018 election. Political strategists say his staying power will depend on whether other coalition parties back Temer if he were to assume office.

"Temer is an experienced and pragmatic legislator, and will enjoy a brief honeymoon period to rally a national unity coalition and pass some market-friendly reforms. Yet he will face many of the challenges bedeviling Rousseff: low popularity, social unrest, a fickle congress, dismal economy and, most importantly, a corruption probe that shows no signs of slowing down," said Cameron Combs, a Brazil researcher at Eurasia Group.

Temer faces a confluence of challenges including an economic recession, high inflation, a widening deficit, volatile currency and widespread bureaucracy.

Given the laundry list of challenges, Temer is expected to hit the ground running by introducing pro-business reforms. Aberdeen Asset Management is recommending that investors buy local currency Brazilian bonds.

"We should see a proactive central bank cut rates by 300-500 basis points (3-5 percentage points) over the next two years," Gutierrez said.

Betting on a political change is still just that, however — a bet. Teneo Intelligence, a global consulting company, wrote in to clients on Friday that the pro-impeachment camp may not succeed.

According to polls, this camp may be roughly 10 votes short of the two-thirds majority — 54 votes out of 81 — necessary to conclude the process at the end of the current Senate trial. There are 19 senators who have not declared their vote yet.