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Brazilian stocks take off – but politics could lay them low again

Brazil’s Bovespa stockmarket index has just reached a new record peak, but investors should keep a close eye on the political backdrop.

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Brazil is bouncing - for now

Brazil's Bovespa index has just reached a new record peak, "driven by optimism over Brazil's emergence from a brutal recession", say Joe Leahy and Andrew Schipani in the Financial Times. GDP is expanding at an annual rate of just under 3%, according to Wells Fargo. With interest rates at a record low, and the labour market healing, consumers are growing more confident. Car sales jumped by 9.2% in 2017. Throw in "fair global winds", and corporate earnings are expected to rise sharply. On a cyclically adjusted price-earnings ratio of 12.8, according to StarCapital, Brazil is still one of the world's cheapest major markets.

That all sounds fine, says Capital Economics, but investors should keep a close eye on the political backdrop. President Michel Temer's pension reforms, which would begin to reduce unsustainably high state spending, appear to have ground to a halt. "Most of the heavy lifting will have to be done by the next government", which will be elected in October. It's too soon to gauge what will happen, but for now "populists (on both the left and the right) are leading the way". If trouble appears to be looming later this year, the rally could well come unstuck.

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