Investors have high hopes for Brazil

Brazil's Ibovespa index was one of the world’s top-performing stockmarkets at the start of the year, while the Brazilian currency, the real, has climbed against the US dollar. So what’s got the bulls so excited?

929_MW_P05_Markets

Can Bolsonaro forge a consensus?

Many emerging markets had a dismal 2018. But Brazil, Latin America's biggest economy, was a rare exception. The benchmark Ibovespa index gained more than 15%; it has also jumped by almost 8% since Christmas, making it one of the world's top-performing stockmarkets at the start of the year. The Brazilian currency, the real, has climbed against the US dollar. So what's got the bulls so excited?

"A primal scream for freedom," is how Mary Anastasia O'Grady puts it in The Wall Street Journal. On 1 January, the newly elected right-wing president Jair Bolsonaro struck a vehemently pro-business tone in his inauguration speech. He vowed to "free" Brazil from "socialism" and end "state gigantism." To that end, finance minister Paulo Guedes promised to "simplify taxes, privatise, free the economy, decentralise" and other structural reforms. Brazil has hitherto leaned toward big-state policies, especially under the leftist Worker's party rule over the last 14 years, notes Andres Schipani in the Financial Times.

A stronger recovery?

Liberalisation should give the economy's potential growth rate a big boost. It would be especially helpful now: Brazil suffered its worst-ever recession in 2014-2016 and the recovery has been lacklustre. GDP only grew at an annualised rate of 1.3% in the fourth quarter, and the unemployment rate is still above 12%.

Popular outrage about the previous government's corruption scandals helped to propel the new president to power. But is Bolsonaro likely to live up to his promises? A crucial step towards getting state spending and public debt now worth around 80% of GDP under control would be radical pension reform. The current public pensions system is overly generous and unjust. But to push through the reforms Bolsonaro would need 60% of votes in Congress.

But that will be an uphill struggle, and could ultimately prove impossible. Bolsonaro's Social Liberal Party only controls 10% of the seats; the rest are split among 30 other parties. So Congress is highly fragmented. And that probably won't change any time soon. "There's little sign Bolsonaro, whose role models include Donald Trump and the late Chilean dictator Augusto Pinochet, has the horse-trading chops to forge such a consensus," says Craig Mellow in Barron's.

In a promise to push for "small government", Bolsonaro has already culled and merged various ministries, says Edward Glossop of Capital Economics. But while further steps to shrink the size of government seem likely in the months to come, the good news is "now surely priced in". Over the next few months, Bolsonaro is more likely to "under-deliver rather than over-deliver." That means we shouldn't expect "the rally in Brazilian markets to last much longer".

Recommended

Kieran Heinemann: the history of shareholder capitalism
Investment strategy

Kieran Heinemann: the history of shareholder capitalism

Merryn talks to Kieran Heinemann, author of Playing the Market: Retail Investment and Speculation in Twentieth-Century Britain, about the history of t…
17 Sep 2021
Why it pays to face up to your investment mistakes
Investment strategy

Why it pays to face up to your investment mistakes

Buying stocks can be a complicated business. But selling stocks can be tricky, too – even if you sell for the right reasons. Max King explains how to …
17 Sep 2021
Are stockmarkets heading for a fall?
Stockmarkets

Are stockmarkets heading for a fall?

America’s S&P 500 stockmarket index has gained 30% over the past year. Valuations may be high, but that doesn't necessarily mean investors should sell…
17 Sep 2021
A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021

Most Popular

Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021
How you can profit from the power of the grey pound
Share tips

How you can profit from the power of the grey pound

Higher life expectancy and surging asset prices have proved a boon for the baby-boomer generation, which has accumulated vast wealth. Younger generati…
10 Sep 2021