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

published 26 January 2018

880_MW_P06_Markets_Bottom — 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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Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

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Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.