RIO DE JANEIRO, April 17 (Reuters) - Some investors are carefully betting that the recent selloff in Brazilian financial markets was overdone, pointing to signs that inflation is slowing and the government is getting its finances in order.
Many expect inflation will come down from its current 11-year high of 8.13 percent, thanks to the central bank's interest rate hike cycle of 1.75 percentage points since October, as well as the economic slump's effect on demand.
Meanwhile, state-run oil company Petrobras is expected to this month post financial statements that have been delayed by a huge corruption scandal, greatly reducing the risk of a major debt crisis that could have cost Brazil its investment grade credit rating.
President Dilma Rousseff's austerity measures to bring government finances under control have also gained traction in Brazil's divided Congress.
In response, the real and the Bovespa index have both gained more than 7 percent since March 19, when the currency closed at a 12-year low. The Bovespa this week hit its highest level this year.
Five-year local rates have dropped 64 basis points to 12.57 percent over the same period, part of a broad rally in Brazil's local currency-denominated debt.
"Some things should do better now, particularly if you believe interest rates and inflation are really going to come down from here," said Bryan Carter, lead emerging markets portfolio manager for Acadian, a Boston-based fund manager with about $60 billion in assets.
To be sure, none of the investors and economists interviewed by Reuters see Latin America's largest economy pulling out of a recession this year. Nor do they expect markets to rally too much, following a rout that saw stocks lose about 20 percent and the currency weaken more than 30 percent from the beginning of September to mid-March.
Under the weight of Rousseff's austerity measures, the economy is expected to shrink at least 1 percent this year and unemployment is likely to rise.
"Until we see an inflection point in the economy, it's hard to be bullish about Brazil," Carter added.
Yet Carter and other investors have already started adjusting their portfolios to take advantage of an eventual decline in inflation and interest rates.
Acadian has been moving out of inflation-linked bonds and into nominal bonds, where it currently has an overweight position, Carter said. It has also been rotating from Brazilian dollar-denominated debt, or credit default swaps, into local-currency denominated debt.
Societe Generale is betting Brazil's 5-year local rates will extend their recent slide, reflecting "a major commitment to fiscal reform."
Morgan Stanley recently recommended its clients go overweight in Brazil's fixed-income markets, while upgrading its stocks to neutral from underweight. It said the country may be able to keep its investment-grade credit rating.
While economic activity indicators will probably deteriorate further in the next few months, the first benign data points are already being seen on inflation.
Inflation expectations for 2015 dropped this week after 14 consecutive weekly rises, a central bank poll showed.
The IPCA-15 index, considered a preview of the official IPCA consumer price index, posted its second consecutive monthly decline even as it came in slightly above expectations.
Still, some investors warn they aren't certain that the equity market has really bottomed out, citing the negative impact austerity measures will have on the economy.
The central bank may not be in a position to immediately start lowering the benchmark Selic rate either because inflation, even as it peaks, will likely remain around the high level of 8 percent for the next few months.
Petrobras shares have rallied 50 percent since March 13 but other companies are still struggling.
"Sometimes the best time to get invested is when things are really all bad. That said, though, it's probably a bit early for that in my opinion," said Geoffrey Pazzanese, who overseas non-U.S. equity assets for Federated Investors, with $50 billion under management.
"I think you need to wait for a little bit more of the bad news to play out," he added. (Additional reporting by Burton Frierson in New York, Editing by Brian Winter and Kieran Murray)