Brazil looks bleak – but too cheap to resist

Bovespa index chart

Brazil is immersed in the worst recession in its history. It’s also gripped by unprecedented political turmoil, with little sign of any light at the end of the tunnel. It’s hardly the most inviting prospect for investors. Yet if you have a long time horizon, are sufficiently patient, and have a stomach for risk, Brazilian assets may be exactly what you are looking for, says Marcos Casarin, a Brazilian senior economist at Oxford Economics. From equities to property to the currency, Brazil has become so cheap after years of underperformance that some analysts are now calling it – with other emerging markets – “the trade of a decade”.

Brazilian stocks have declined steadily for several years now. The country’s main stock exchange, the Bovespa, is trading at close to its lowest point since 2008. The value of the Brazilian real against the US dollar has also fallen sharply and is currently at near-record lows. Little wonder. The International Monetary Fund reckons Brazil’s GDP will shrink by 3.5% in 2016, lagging only Venezuela.

Fiscal adjustments have taken a back seat as politicians grapple with a huge corruption scandal at state-run oil giant Petrobras, while the threat of impeachment hangs over President Dilma Rousseff. All three main credit-rating agencies have downgraded Brazil’s sovereign debt to junk and fear there could be “further deterioration in debt ratios amid an economic contraction, as well as the risk of further external shocks”.

Yet however bleak the scenario, Brazil is still a leading emerging market and one of the most promising in Latin America, says Geert Aalbers, head of the consultancy Control Risks in Brazil. “We have a lot of clients looking for cheap assets in Brazil, taking the opportunity of the Brazilian currency depreciation and the fact that a lot of companies affected by corruption investigations or hit by the economic downturn are now divesting.”

Of course there is uncertainty and it is hard to predict how the political crisis might turn out. But it’s fair to say the market is now pricing in a pretty dreadful scenario. To us, Brazil looks cheap on a cyclically adjusted price/earnings ratio of around seven. You can buy in via an exchange-traded fund that tracks the Bovespa, the iShares MSCI Brazil ETF (LSE: IBZL). It has bounced significantly in the past month, but could well have a lot further to go.