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Why Cia Energetica de Minas Gerais, Companhia Siderurgica Nacional, and Everything Else in Brazil Are Falling Apart Today

By Rich Smith – Updated May 18, 2017 at 1:24PM

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A presidential bribery scandal just tanked the Brazilian stock market.

What happened

Think the ongoing investigation into possible ties between Russia and Donald Trump's campaign has done a number on U.S. stock markets this week? Well, count your lucky stars you don't live in Brazil. This morning, Brazilian industrial and utilities stocks are tumbling. As of 11 a.m. EDT, shares of the following companies are down:

  • Cia Energetica de Minas Gerais (CIG -0.72%) -- 15.5%
  • Companhia de Saneamento Basico (SBS 4.77%) -- 15.5%
  • Companhia Siderurgica Nacional (SID 0.22%) -- 15.2%
  • Cosan Ltd. (CZZ) -- 10.5%
  • Gerdau SA (GGB -0.56%) -- 12.5%

So what

CNN has the story in a nutshell. Nine months after Brazilian President Dilma Rouseff was impeached and driven from office for "breaking budgetary laws," local paper O Globo is reporting that her replacement, Michel Temer, is now in trouble as well. According to the paper, Temer offered imprisoned former house speaker Eduardo Cunha "hush money" to keep quiet about the investigation while in prison -- and was caught on tape doing it.

In a twist too strange to be fiction, the tapes were recorded by Brazilian meat and chicken conglomerate JBS. This is particularly significant because the owner of JBS apparently has himself admitted to paying Cunha 5 million Brazilian reals and to promising to pay 20 million more, as bribes made in exchange for favorable tax treatment for his company.

Brazil map under magnifying lens.

What the heck is happening to Brazilian stocks today? Image source: Getty Images.

Now what

President Temer's spokespeople are naturally denying the allegations. Of course, if there are tapes of him offering bribes, then those are going to be pretty hard to explain away. So what's the upshot for investors?

Right now, things look pretty bleak for them, as they lick their wounds but see the bleeding continue nonstop. On the other hand, it's worth pointing out that since the Rouseff impeachment, Brazil's Bovespa stock index is actually up 7% (yes, even after this morning's tumble). This could turn out to be a case where stocks faced with uncertain times "climb a wall of worry," and perform better than you'd think events would dictate that they should. Perverse as it may seem to suggest it, the best time to invest in Brazil could be right now.

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Companhia de Saneamento Basico. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cosan Limited Stock Quote
Cosan Limited
Gerdau S.A. Stock Quote
Gerdau S.A.
$4.42 (-0.56%) $0.03
Companhia Siderúrgica Nacional Stock Quote
Companhia Siderúrgica Nacional
$2.27 (0.22%) $0.01
Companhia Energética de Minas Gerais Stock Quote
Companhia Energética de Minas Gerais
$2.06 (-0.72%) $0.01
Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP Stock Quote
Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP
$8.46 (4.77%) $0.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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