Features

Investors turn on Brazil

Emerging-markets investors have turned their guns on Brazil, sending the real to a two-year low and wiping 15% off the stockmarket in three weeks.

900_MW_P07_Markets

Brazil's stockmarket is now one of the world's cheapest

Emerging-markets investors have turned their guns on Latin America's biggest economy, sending the Brazilian real to a two-year low against the dollar and wiping 15% off the stockmarket in three weeks. The resignation of Pedro Parente, the head of the state-owned oil giant Petrobras, made "management competence look like an ephemeral blip of commonsense rather than a new beginning", as Martin Langfield notes on Breakingviews. More broadly, the episode also made clear that Michel Temer is a "lame-duck" president whose pro-business reforms to boost growth and reduce Brazil's chronic overspending have run into the sand.

Parente took the rap for a lorry drivers' strike that had paralysed much of the economy. He had ended the long-standing policy of subsidising fuel prices, allowing them to track the market. That reduced government spending. Now diesel prices have risen along with global oil prices, and Temer has bought off the lorry drivers by freezing diesel prices for two months.

Upending Parente's reforms at Petrobras "portends longer-term difficulties in righting Brazil's finances" especially because Temer is too unpopular to run in October's presidential election, and a ragbag of populists are competing for the prize. The current favourite, Jair Bolsonaro, "has been drubbed the Trump of the Tropics", says Craig Mellow in Barron's. It's hard to tell what his policies are.

The upshot is that we can expect scant progress on "pruning an overgenerous pension system", which is one of the key reasons Brazil is overspending and rapidly racking up public debt. The government owes 74% of GDP and overspent by 8% of GDP last year.

It's not that bad

Still, investors may be overreacting. The political backdrop is certainly inauspicious, but progress always comes in fits and starts. And Temer did manage to loosen labour regulations and introduce legislation to phase out subsidised lending for companies, a major drain on taxpayers. He successfully implemented a 20-year public-spending ceiling and increased the central bank's autonomy. He also embarked on a privatisation spree.

The short-term economic outlook is improving. The business cycle has turned after the worst recession in a century, with GDP expected to expand by 2.3% this year. A buoyant global economy implies healthy demand for Brazil's many soft and hard commodities.

What's more, the current turbulence is arguably in the price. Brazil's cyclically adjusted price-earnings ratio of 14.5 means it is now one of the world's cheapest major stockmarkets. The latest price decline could well prove a buying opportunity.

Recommended

Emerging markets fall behind their developed-world counterparts
Emerging markets

Emerging markets fall behind their developed-world counterparts

While developed-world markets look forward to a recovery, emerging market stocks have tumbled as foreign investors pull out cash.
16 Apr 2021
Four of the best investment trusts for investing in emerging markets
Investment trusts

Four of the best investment trusts for investing in emerging markets

Investors need to tread very carefully in this risky sector. Here are the best ways to approach it
22 Mar 2021
Storm brews in emerging markets as investors pull cash out
Emerging markets

Storm brews in emerging markets as investors pull cash out

Foreign investors have begun to pull cash out of emerging markets as they begin to look less attractive when compared to the rising return from holdin…
12 Mar 2021
I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020

Most Popular

Big Tech on steroids: why the 2020s will be the “decade of the DAO”
Bitcoin & crypto

Big Tech on steroids: why the 2020s will be the “decade of the DAO”

Big tech companies have transformed the way we live our lives. But if you thought they were disruptive, you haven’t seen anything yet. As Dominic Fris…
6 May 2021
Could you end up paying inheritance tax on your family home?
Inheritance tax

Could you end up paying inheritance tax on your family home?

The value of the average UK home has risen by 53% since April 2009, but the inheritance tax threshold has remained static. And that means more people …
7 May 2021
Cryptocurrency ether has hit an all-time high. Why? And will the bull market last?
Bitcoin & crypto

Cryptocurrency ether has hit an all-time high. Why? And will the bull market last?

Cryptocurrency ether – the world’s largest cryptocurrency by market cap after bitcoin – hit an all-time high this week. Saloni Sardana looks at what’s…
5 May 2021