Time to hunt for bargains as Brazil's economy runs out of puff?

Brazil has fallen out of favour with investors - that could be good news for bargain hunters.

The Brazilian government sees hosting this year's football World Cup as confirmation that the country of the future' has finally arrived, says Lex in the Financial Times. "If so, it will be arriving tired and out of puff."

Having grown by more than 7% in 2010, GDP rose by a mere 2% last year, and the economy actually shrunk slightly in the third quarter.

Brazil has squandered much of the windfall it gained from the commodities boom, says Lex. Instead of using the money to boost investment, it "inflated a consumer bubble" as people were able to borrow more freely. Now the commodities boom has ended.

Yet companies are still choked by red tape, and recent heavy-handed moves by the government such as trying to force energy firms to cut prices have rattled businesses and hampered investment.

Meanwhile, the weakening currency the real is driving inflation higher, which means interest rates will have to rise further too, to tackle it. The public finances have also deteriorated: the budget deficit is worth 3.5% of GDP.

So, "the wheels have been half-off [the economy] for quite a long time", says James Lockhart-Smith of Maplecroft. What's more, the US Federal Reserve has started to taper' ie, print less money each month.

Even a gradual decrease in global liquidity makes emerging markets less appealing. So it's little wonder Brazilian stocks slid by 16% last year, while the real slumped by15% against the US dollar.

Measured in dollars, Brazil saw more money flee the country than at any time since 2002. If Mexico is a market that investors "can't get enough of", says Reshma Kapadia in Barron's, then "Brazil is the anti-Mexico".

An unloved market, however, is also a cheap one, and it looks to us as though the bad news is now in the price. The market's cyclically adjusted price/earnings ratio is just 10.6, compared to an average of 17 since 1988; in the US the ratio is 25. And Brazil is hardly a basket case. Real incomes are still rising, unemployment is close to a record low and inflation of 6% is a far cry from hyperinflation.

There should be plenty of future demand for the country's agricultural commodities. There will be plenty of future consumers too, thanks to the huge and young population. Brazil plays, such as the JPMorgan Brazil Investment Trust (LSE: JPB) or the iShares MSCI Brazil UCITS ETF (LSE: IDBZ), are once again worth a look.

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