Brazil passes pensions reform

Brazil has finally completed a long-awaited overhaul of its pension system.

Brazil stockmarket traders © Getty Images
Equities are attractively priced, but prepare for turbulence

"It took three presidents, four finance ministers and countless setbacks," says Julia Leite on Bloomberg. But Brazil has finally completed a long-awaited overhaul of its pension system. Lawmakers have approved reforms that should save the country about 800bn reais (£155bn) over ten years by increasing minimum retirement ages and closing loopholes.

Brazil's Ibovespa stock index has surged 21% over the past year. Yet that rally has been driven by domestic money. Foreign investors have withdrawn money amid scepticism about whether this reform story has further to run.

The passage of the pension bill could bring the "outperformance of Brazilian assets to an end", says William Jackson of Capital Economics. After a strong run at the start of the year, the total return on the country's stocks has been among the worst of any major emerging market since the first pensions vote on 10 July. "It looks like the good news on reform is already priced into local markets."

The end of the reform story?

Brazil's ballooning pensions bill was a serious threat to the nation's future, say Paulo Trevisani and Jeffrey Lewis in The Wall Street Journal. Pensions accounted for a whopping 44% of the federal budget last year. Many public sector workers retire as early as their late 40s on handsome pensions. The reform should begin to stabilise federal finances that were getting dangerously out of control. So urgent had the issue become that "many took to the streets in rallies to demand a pension overhaul, rare in a country trying to roll back benefits".

Yet while the legislation will help Brazil avoid bankruptcy, "it won't spark growth", says Leite. With GDP forecast to rise by less than 1% this year, the flagging economy "desperately needs a jump-start".

Finance minister Paulo Guedes is pushing ahead with plans to overhaul the "byzantine" tax code and cut a bloated public sector, report Anthony Boadle and Jamie McGeever on Reuters. Yet where pension reform had been "debated in Congress for years before [Brazilian president Jair] Bolsonaro took office", the rest of the Guedes agenda is likely to spark opposition.

A fight between rival factions for control of Bolsonaro's own party is a barrier to further progress. Bolsonaro could also torpedo Guedes if he turns "his big mouth" on his economic team, Monica de Bolle of the Peterson Institute for International Economics tells the Financial Times. Buyers of Brazilian stocks will thus need strong stomachs. Civil unrest in neighbouring countries is a reminder that the risks are high. Yet for long-term value investors, stocks trading on a cyclically-adjusted price/earnings ratio of 17.4 are attractively priced. Just be prepared for turbulence.

Recommended

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
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Beware the hidden risks when investing in emerging markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Emerging markets: buy when the news is bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
UK post-Covid recovery stocks: these 20 companies could be set to rocket
Share tips

UK post-Covid recovery stocks: these 20 companies could be set to rocket

Finding stocks with the potential to rise tenfold or even further is far easier said than done. But the pandemic has produced the most promising backd…
22 Oct 2020
Big spending government is here to stay – just ask Rishi Sunak
UK Economy

Big spending government is here to stay – just ask Rishi Sunak

Governments around the world are splashing huge amounts of cash as they do “whatever it takes” to prop up their economies. John Stepek looks at where …
23 Oct 2020