Brazil hits rock bottom – it’s time to buy

A corruption scandal at the national oil company has frightened away investors. Andrew Van Sickle looks at two cheap funds to buy into Brazil.

731-petrobas-634

Much of the economy is tied into Petrobas

Not long ago, Brazil was seen as one of the emerging world's most promising markets. Now investors have started to think of it as a "Latin American sinkhole", says Mac Margolis on bloombergviews.com. Things are going from bad to worse.

A corruption scandal at the national oil company Petrobras and a "Biblical drought" are adding to an already lacklustre economic backdrop.As opposition parties call for the president's impeachment, Brazil looks set to slip into recession. The benchmark index has fallen over 15% in the last six months, and is close to a six-year low.

The crisis at Petrobras

Contracts worth a total of $23bn are being investigated. Over the past few months, prosecutors have charged 39 people for corruption, money laundering and organised crime.

"The economy is already paying the price," say Marla Dickerson and Rogerio Jelmayer in The Wall Street Journal. Petrobras is a key source of capital investment. It has now cancelled projects and delayed payments to the accused contractors, while some of the latter have frozen credit.

"Petrobras is at the centre of a gear that moves hundreds of companies and millions of people," adds Eliane Cantanhede in the daily newspaper O Estado De S. Paulo. "If it chokes, the machines stop."

Drought will lead to power cuts

Tot these problems up, and we could be looking at a 1.5% hit to growth this year, says Neil Shearing of Capital Economics. The reduced investment following the Petrobras imbroglio could account for a third of this, and that's to say nothing of indirect effects, such as the damage to Brazil's "international investment image".

Power rationing amid the drought could shave a further 0.5%-1% off growth. That points to a possible recession, as the economy was not expected to produce more than marginal growth this year in any case. The commodities boom has cooled, denting exports, and households have reined in spending after a borrowing spree.

That's exposed Brazil's comparatively low rate of investment, around 18% of GDP, which must riseif long-term growth is to improve.The emerging-market average is 25%.

But structural problems, such as inflexible labour laws, red tape and corruption, have hampered progress. Corruption consumes around 2.3% of GDP a year, notes bloombergview.com. A toughanti-corruption law has been passed, but it has yet to be implemented fully. The government also needs to get a grip on public spending.

A buying opportunity

The currency, the real, is at a ten-year low against sterling. That implies plenty of upside if Brazil begins to get its act together. There is lots of long-term potential, with a young population and a wide selection of agricultural commodities key among the plus points. Ways to invest include the iShares MSCI Brazil UCITS ETF (LSE: IDBZ) and the JPMorgan Brazil Investment Trust (LSE: JPB).

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