Brazil’s run is far from over

Brazilian stocks are on a roll. The benchmark Bovespa index gained 40% in 2016 and has notched up another 30% this year.

"You'd hardly think this was a country gripped by crisis," says Jonathan Wheatley in the Financial Times. Brazilian stocks are on a roll. The benchmark Bovespa index gained 40% in 2016 and has notched up another 30% this year. This is despite President Michel Temer becoming the second Brazilian leader in two years to become embroiled in a corruption scandal. His predecessor Dilma Rousseff was impeached. Prosecutors have accused Temer of running a "criminal organisation"

So what's gone right? For one thing, the macroeconomic backdrop has improved after the worst recession in a century. Growth of 2.4% has been pencilled in for next year. The uptick in commodities prices has bolstered exports, while falling inflation at home has provided scope for interest-rate cuts. Last month the central bank cut rates by a whole percentage point. Earnings are finally beginning to surprise on the upside, as the FT's Joe Leahy points out.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Meanwhile, Temer is "a master of legislative manoeuvring", says Martin Langfield on Breakingviews.So he should survive a vote in the lower house of Brazil's Congress on whether he should be sent to trial or not. That means he is likely to finish his term, which ends next year. That in turn has allayed fears that his structural-reform programme will be ditched.

His key policy, raising Brazil's retirement age from the mid-50s to the mid-60s, may now get stuck in Congress, but he has made progress elsewhere. The government has pushed through a 20-year public spending cap, loosened labour regulations, and is phasing out subsidised lending for corporations, a major drain on taxpayers. It has just liberalised the oil sector by allowing foreign firms to bid for drilling rights, hitherto largely reserved for the state oil company Petrobras. Temer has promised several privatisations, which will help trim recurrent state outlays too. After all, say Simone Preissler Iglesias and Luisa Marine on Bloomberg, it's unlikely that the new owner of the National Mint will keep providing its 2,700 employees with free access to dentists, nutritionists and on-site massage therapists.

Advertisement
Advertisement - Article continues below

It's not clear whether this auspicious backdrop will last beyond next year; polls suggest Temer could be succeeded by a far-right populist. Still, on a cyclically adjusted price/earnings ratio of 12, Brazil is still one of the world's cheapest markets, so this uncertainty is arguably in the price. The rally looks far from over.

Advertisement

Recommended

Visit/investments/stockmarkets/600688/bullish-investors-return-to-emerging-markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Visit/519872/beware-the-hidden-risks-when-investing-in-emerging-markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/517395/emerging-markets-buy-when-the-news-is-bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/economy/uk-economy/601063/the-uks-bailout-of-the-self-employed-comes-with-a-hidden-catch
UK Economy

The UK’s bailout of the self employed comes with a hidden catch

The chancellor’s £6.5bn bailout of the self employed is welcome. But it has hidden benefits for the taxman, says Merryn Somerset Webb.
27 Mar 2020
Visit/investments/commodities/gold/601037/gold-is-on-a-wild-ride-so-should-you-be-buying
Gold

Gold is hard to find right now – so should you be buying?

With demand through the roof and the physical metal hard to find, it's not the best time to buy gold. But right now, says Dominic Frisby, you want to …
25 Mar 2020
Visit/investments/stocks-and-shares/share-tips/601035/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
27 Mar 2020