The World Cup may be kicking off , but Brazil is not in the mood to party. As far as the economy and stock market are concerned, the party of the last few years is over and a hangover has set in. Economic growth, which hummed along at over 4% a year for much of the past decade, has slowed to an annual pace of just 1.9%.
So what’s gone wrong? Brazil is a major exporter of commodities, notably iron ore, and now that China’s appetite for commodities has cooled, momentum has ebbed.
The domestic economy is unlikely to come to the rescue: consumers overborrowed during the good times, while business confidence is also subdued. A rise in inflation to over 6% means that interest-rate hikes are likely to be in the offing, subduing growth further.
What’s more, the structural problems weighing on growth, which were easy to ignore during the commodities boom, haven’t gone away.
The main long-term worry is that Brazil doesn’t invest enough. It only devotes around a fifth of its national income to investment, compared to 25% for the average emerging market.
On top of that, Brazil’s track record of implementing public investment programmes is “woeful”, says Capital Economics. No wonder, then, that only two-thirds of the pre-World Cup investment programme has been completed.
Red tape is also a perennial problem and recent government meddling with petrol and energy prices has rattled businesses, making them even less likely to invest.
So it’s no surprise that the benchmark Bovespa index slid by over 20% last year. But this could be a good entry point. Brazil is now on a cyclically adjusted price-to-earnings ratio of 10.2, making it one of the world’s cheapest major stock markets. In other words, the current problems, which are hardly insurmountable, are in the price.
Brazil has plenty of long-term advantages, including a huge and young population – the median age is 29 – and enough soft raw materials to be an “agricultural superpower”, says Tom Phillips in The Daily Telegraph.
It’s the world’s top soy exporter and a major producer of corn, sugar cane and beef. Brazil plays include the iShares MSCI Brazil UCITS ETF (LSE: IDBZ) and the JPMorgan Brazil Investment Trust (LSE: JPB).