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.

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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.

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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.




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