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Junk rating be damned.

Investors piled back into Brazil with gusto in 2016, as the ousting of president Dilma Rousseff encouraged punters to buy into a reform-led turnaround story even after the country was stripped of its investment-grade status by all three major credit rating agencies.

Net investment flows into Brazilian funds totalled BRL 109.1bn last year, according to a new report published by Moody’s on Thursday. That is the highest level since 2010 and follows two years of stagnant flows.

The rebound comes even as Latin America’s largest economy remains mired in its worst recession in over a century. Moody’s analyst Diego Kashiwakura said investors have been more than willing to overlook the country’s still-dismal economic fundamentals in return for yields.

“Total net investment flows have had a low correlation with economic growth over the last decade,” said Mr Kashiwakura. “Instead, the main drivers behind investment flows have been interest rates, risk appetite and the availability of investment substitutes, which are not necessarily linked to economic performance.”

Until late last year, Brazil boasted some of the highest borrowing costs among major economies, with benchmark Selic rates sitting at 14.25 per cent throughout a good part of 2015 and 2016. That has made the country’s bond market irresistible, and not surprisingly, fixed-income funds received the bulk of the last year’s inflows, taking in BRL 49bn.

For dollar-denominated investors, these bond returns have been magnified by the real’s 22 per cent rally against the greenback last year.

Interestingly, despite the Bovespa’s 39 per cent advance last year, equity funds continued to see outflows.

However, Moody’s said it expects a modest reversal of those outflows this year. As the country’s central bank begin to loosen interest rates once again, this should drive some of the flows from fixed income to equity funds.

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