Ingredients Missing For A Turnaround In Brazil [iShares MSCI Brazil Index (ETF)]

brazilBrazil has struggled in the past years, bogged down by unfavorable economic conditions including a collapse in growth. A recovery would hinge upon some much needed structural reforms.

3.14_ingredients

Five years ago investors could not get enough of Brazil. Today, many have written off the country following several years of poor performance, decelerating growth and chronically high inflation. If Brazil is to reclaim its place as an investment destination, its equity market will either need to get cheaper, or a more obvious catalyst—preferably a pro-reform agenda—will have to emerge.

A cursory look at a chart of the Brazilian stock market would justify the use of the term ‘rollercoaster ride’. Brazilian equities tumbled 20% from the fall of 2013 through last spring, then proceeded to rebound nearly 40% on hopes for a more reform-minded government being elected in the presidential election that took place in October. When that proved illusory, the market started to fade again. From last September’s highs to today, Brazilian equities are down more than 20% and over 40% in U.S. dollar terms. If you look at the longer term, a dollar based investor is basically back to where they were at the start of the bull market in 2009. What accounts for this fall from grace?

Collapse in growth. Arguably the biggest disappointment has been the steady erosion in economic growth. In 2010 Brazil grew by over 7%, but since then a drop in commodity prices and a lack of structural reforms have been punishing for the economy. Brazil did not grow at all last year, and is expected to stagnate again in 2015.

Inflation. Despite stalling growth, inflation has remained stubbornly high. Inflation came in at about 6.5% last year, which is near the upper-end of the central bank’s target range, and is above 7% today.

Debt. Consumers, as well as the government, are borrowing more amid weakened economic conditions. Gross debt for Brazil is now around 64% of its gross domestic product. The burden is even more problematic if you consider the country’s high interest rates—the policy rate was just raised to 12.75%, one of the highest among major economies—which dramatically increase the costs of servicing debt. The credit rating on national champion oil producer Petrobraswas recently lowered to junk status, adding to investor worries that Brazil’s sovereign debt will suffer the same fate.

Pages: 1 2

Leave a Reply

Your email address will not be published. Required fields are marked *