SAO PAULO, Aug 6 (Reuters) - Verde Asset Management, Brazil's largest hedge fund, said the country is flirting with disaster as policy response to growing fiscal disarray and fallout from a political crisis are clouding visibility for investments in Latin America's largest economy.
In a monthly letter to investors published late on Thursday, money managers led by Luis Stuhlberger said the list of headwinds facing Brazil is long: a swelling budget deficit, an unstable currency that could tank further, rapidly eroding support for President Dilma Rousseff and policymakers' failure to head off stubborn inflation.
While Stuhlberger did not specify Verde's positions in currency, equity and debt markets as he did in prior letters, he said Brazil's main challenges include stabilizing public finances and finding a way to keep growing political turmoil from contaminating the economy.
Investors see as "inevitable" the possibility that Brazil's sovereign debt rating is lowered, the letter said. While the currency and credit markets are reasonably factoring that situation in, the country's domestic equity market has yet to "adequately price in such a risk," Stuhlberger wrote.
"On the economic and political fronts, we continue to flirt with an abyss," he said.
In a crisis whose intensity has been likened to the one that led to former President Fernando Collor de Mello's impeachment in 1992, Rousseff is struggling to cut spending and fend off opposition calls to step down after her government became ensnared in a corruption scandal at state-owned firms. Investors are closely attuned to further turbulence that could knock efforts to stabilize the economy off track.
Sao Paulo-based Verde posted a consolidated return of 5.41 percent in July, the highest in 10 months. Verde, which has been closed to new investors for years, recorded an accumulated 21 percent return this year, compared with 7.16 percent for the benchmark CDI interbank lending rate.
The letter suggested that Stuhlberger's long-time bets on a generalized decline in Brazilian assets this year are finally paying off.
The Brazilian real touched the lowest level in more than 12 years on Thursday after shedding as much as 2 percent to hit 3.562 reais to the dollar. The benchmark Bovespa stock index is trading near the lowest levels in eight years, when measured in dollars.
Verde oversees about 30 billion reais ($9 billion) in assets.
$1 = 3.5333 Brazilian reais Reporting by Guillermo Parra-Bernal and Paula Arend Laier; Editing by Leslie Adler