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.

Recommended

5 of the best gold ETFs
Gold

5 of the best gold ETFs

Some investors like to hold gold as an insurance policy against uncertainty, but buying the physical metal can be tricky. Here are the best gold ETFs …
13 Mar 2023
3 ETFs to buy now
Funds

3 ETFs to buy now

We take a look at three exchange-traded funds that investors could benefit from investing in
13 Mar 2023
Should you stick with Mid Wynd investment trust?
Investment trusts

Should you stick with Mid Wynd investment trust?

Max King looks at the prospects for Mid Wynd as the trust prepares to say goodbye to Simon Edelsten and Alex Illingworth, managers of the trust since …
9 Mar 2023
The ten investment trusts with the highest dividend yields
Investment trusts

The ten investment trusts with the highest dividend yields

Investment trusts are one of the best ways to participate in the stockmarket, and the way they are structured means they can maintain their dividends …
2 Mar 2023

Most Popular

Five changes to state pensions coming next month
Pensions

Five changes to state pensions coming next month

There are several changes happening to state pensions in April. We explain what’s happening.
22 Mar 2023
When will interest rates go up?
UK Economy

When will interest rates go up?

The Bank of England raised rates to 4.25%, its 11th consecutive increase. Does the base rate have further to go?
23 Mar 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Ofgem’s price cap is now predicted to fall below £2,000, based on average typical use, from July, for the first time since 2022. We have all the detai…
21 Mar 2023