NEW YORK (Reuters) - Some investors are betting the worst is yet to come for Brazil’s stock market, even after a brutal selloff last week.

A demonstrator shows a picture of President Michel Temer near a burning barricade during a protest against Temer and the latest corruption scandal to hit the country, in Brasilia, Brazil, May 24, 2017. Picture taken May 24, 2017. The sign reads: "Out Temer!." REUTERS/Ueslei Marcelino

Fund managers said troubles for Brazilian President Michel Temer, who was caught on tape discussing a hush-money arrangement to buy the silence of imprisoned former house speaker Eduardo Cunha, are likely just beginning, and could derail efforts to reform Brazil’s pension system, moves aimed at cutting public debt and boosting economic growth.

Brazil’s benchmark Bovespa stock index tumbled nearly 9 percent on May 18 after news of the tape surfaced, notching its biggest one-day drop since the depths of the financial crisis in October 2008.

Short sellers descended on funds containing Brazilian shares on the belief they have further to fall.

About 12 percent of shares of the $5.6 billion U.S.-listed iShares MSCI Brazil Capped ETF are being shorted, according to S3 Partners, a financial analytics firm. The fund ranks as the second most-shorted country ETF in the United States by dollar value of short interest.

Investors who take short positions sell borrowed stock they hope to buy back later at lower prices to reimburse the lenders, pocketing the difference.

The Brazil ETF pulled in $526 million of new money in the week ended on Wednesday, according to Thomson Reuters’ Lipper research unit, but those figures include shares created so they could be sold short.

“As EWZ’s stock price dropped, short sellers needed to short more stock in order to keep their risk positions at the same levels,” said S3 Partners managing director of research Ihor Dusaniwsky.

EWZ’s short sellers have a 9 percent profit since last Thursday, he said, with most of that made the day of the big selloff.

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To be sure, some of the fund’s inflows could also be from investors betting that the recent selloff does not reflect fundamentals underpinning the market.

Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital LLC, said he has seen demand for EWZ over the past week from both short-sellers and bargain-hunting “value” investors.

SELLING OUT

Robert Marshall Lee, investment leader and portfolio manager at BNY Mellon subsidiary Newton Investment Management, has sold all Brazilian assets in his company’s $136 million Newton Global Emerging Markets Fund.

Even if Temer stays in power his position has been significantly weakened, Lee said, and with much of Brazil’s population opposed to fiscal restructuring measures like pension reform it would be difficult to pass them.

“What you end up doing is a very watered-down version,” he said. “So the market has optimism and then gets disappointed and I think that’s the likely path ahead.”

Brazil and broader emerging markets are likely to end the year with lower equity prices and weaker currencies, Capital Economics senior emerging markets economist William Jackson said.

Yet Brazil’s problems have so far shown little sign of leaking into the broader emerging markets sphere. The average U.S.-based emerging market fund tracked by Lipper sank by just 0.4 percent over the most recent week and pulled in $1.1 billion in new cash.

Economists warn that Brazil’s social security system is one of the main threats to government finances there, with pension expenditures accounting for nearly half of its spending before debt payments. Temer’s plans to streamline Brazil’s pension system cleared another hurdle in Congress on Tuesday.

Current House speaker Rodrigo Maia said a vote in the full lower house could take place between June 5 and June 12, clearing the way for a final Senate vote, but many lawmakers have said they will not vote until the political crisis is resolved.

Meanwhile, some investors are moving in on what they see as a buying opportunity in Brazil. The Bovespa was last up 1.2 percent on Friday.

“If you are a patient long-term investor able and willing to stomach significant volatility, current valuations offer an attractive opportunity to gradually build both bond and equity positions,” said Mohamed El-Erian, chief economic adviser at Allianz SE. “There is value but the road will be very choppy.”

Ivo Luiten, a portfolio manager at the emerging markets boutique firm NN Investment Partners, in the Hague, Netherlands, said he had taken the opportunity to add to his holdings in telecommunications, education and healthcare stocks, which he said fell 10 percent to 15 percent in the selloff.

“We’re not selling out of Brazil,” he said. “We’re adding.”