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Brazil’s recession deepens, but still plenty of upside for investors
Brazil's economy is set to shrink by 2% this year. But with a large, young population and plenty of soft commodities, there is plenty of upside.
"It is sometimes said that Brazil tries every approach to economics until it finally chooses the right one," says the Financial Times. In 2010, GDP rose by 7.6%, capping a strong decade. But the economy is set to shrink by 2% this year after a 1.9% fall in the second quarter alone.
Some of this is due to global trends. The commodity cycle has turned down, crimping Brazilian exports of iron ore and oil. Consumers racked up debts worth a record 46.3% of disposable income during the boom, on which they pay high interest rates. So they won't be driving growth for some time.
But the other key component of growth, investment, is suffering from a huge corruption probe at Petrobras. Politicians raked in $2bn in kickbacks from the state-owned oil giant. Companies implicated in the investigation have put expansion plans on hold and even those only indirectly affected have been rattled by the uncertainty. Petrobras and the construction sector, for instance, both account for 10% of national investment. Overall fixed investment shrank by 8% between April and June.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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It hardly helps that Brazil has always suffered from comparatively low investment as a proportion of GDP, which helps explain the poor infrastructure, while the government has also unnerved markets by admitting that getting on top of the budget deficit (almost 7% of GDP last year) will be harder than it thought.
What's more, with inflation above 9%, there is scant scope for interest rate cuts. Still, "pessimism has overshot reality", as Latin America security and economics consultant James Bosworth puts it. Brazil's democratic institutions seem strong enough to successfully prosecute the Petrobras inquiry, which will make Brazil a more attractive investment destination, he reckons. And a recent bounce in exports may signal the start of a slow recovery.Even if it doesn't, a lot of bad news is in the price.
The real is 50% down against the US dollar in two years and Brazilian stocks, back to 2009 lows, are now among the world's cheapest on a cyclically adjusted price/earnings ratio of nine. There seems plenty of upside for a country with a large, young population and plenty of soft commodities. Investors can get exposure via the iShares MSCI Brazil UCITS ETF(LSE: IBZL) and the JP Morgan Brazil Investment Trust (LSE: JPB).
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