A rare opportunity for investors in Brazil

Brazil is the country of the “perennial future”, writes Craig Mellow in Barron’s. Brighter times are always promised, but disappointment often follows. The economy has spent half the time since 2014 in recession. The Ibovespa index is up by 4% in local currency terms over the past 12 months, but the plunging currency, the real – down by 20% against the US dollar last year – means those gains turn into losses when translated into major currencies.

The market has been hampered by its exposure to out-of-favour industries. Raw materials (which includes miners such as Vale) and energy account for one-third of the MSCI Brazil index. The cyclical financial sector comprises another 28%. Yet talk of global “reflation” and a new commodities boom could see those weaknesses turn into strength this year.

Brazil’s new savings culture

Traumatised by the hyperinflation of the 1980s, Brazilians are not natural stockmarket traders, says The Economist. The country’s savers became “addicted” to the high interest rates that were used to get inflation under control, preferring to stash their money in fixed-income accounts. Yet the central bank has slashed rates from more than 14% in 2016 to just 2% now. That has turned many ordinary Brazilians into novice stockpickers. The number of retail investors on the local stockmarket has quintupled since 2017.

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The frenzy has been centred on initial public offerings (IPOs), says Michael Pooler in the Financial Times: 28 firms went public last year, the highest number since 2007. This year is likely to be even more frenetic, with 41 already saying they intend to float, including “an iron ore miner” and “a crematorium operator”.

Long sceptical, foreign investors are now joining in too. The end of 2020 brought strong overseas investment inflows as money managers began to notice that a weak currency makes Brazilian assets cheap. The government launched a generous stimulus package last year that cushioned the worst of the pandemic’s economic fallout, but it is now feeling the fiscal hangover; years of mismanagement will soon send the government debt-to-GDP ratio above 100%, a dangerously high level for an emerging economy.

Brazil’s politicians are particularly unimpressive, says Mellow. The fractured Congress has spent most of this month quarrelling about new leadership and will “then take much of February off for Carnival”. Structural reforms now look unlikely before elections next year. Nevertheless, after so much bad luck the country’s shares appear to offer a rare opportunity. British investors who can stomach the risks may wish to consider iShares MSCI Brazil UCITS exchange-traded fund (LSE: IBZL).