Investors lose faith in Brazil

You would think that soaring energy, mineral and food prices would be good news for a commodity exporter such as Brazil, says Simon Constable in Barron’s. Yet the local stockmarket has been the world’s worst-performing this year. The benchmark Bovespa index has fallen by 11% since 1 January. October marked the fourth losing month in a row for Brazilian stocks, their worst showing since 2014. The real currency has lost 8% against the US dollar so far this year. Economic reform and the commodities boom had tempted in foreign investors, but now “you’ve got a lot of people who are giving up hope”, says Phillip Torres of Aegon Asset Management.  

Brazil looks cheap on a cyclically adjusted price/earnings (Cape) ratio of 16.8, according to data from Mebane Faber of Cambria Investment Management. Yet this is no time to go bargain hunting. “A more challenging macro scenario” may see earnings forecasts cut, making currently low valuations deceptive, private banking firm Wealth High Governance tells Bloomberg. 

The latest sell-off came as Brazil planned a spending splurge ahead of elections next year. The government of far-right president Jair Bolsonaro wants to spend $14bn on a new welfare programme, a plan that will breach a constitutional spending cap. As Michael Pooler explains in the Financial Times, the cap “limits budget increases in line with inflation and is regarded as a pillar of the country’s economic credibility”. Four senior economic officials have resigned in protest. 

Dangerous debt  

Brazil can ill-afford a new spending splurge, says Desmond Lachman for The Hill. A Covid-19-induced recession sent the country’s budget deficit up to a record 10% of GDP last year and saw public debt top 100% of GDP. That far exceeds the 70% level that emerging markets try to avoid hitting for fear of “a public debt crisis”. The real’s plunge at a time of “ample global liquidity” is especially worrying; a gradual tightening of US monetary policy means the real’s woes could just be beginning. The independent central bank faces a horrible “dilemma” between “losing control of inflation” and hiking rates to levels that create serious economic pain. It has so far chosen the latter option, raising interest rates 5.75% since March, making it the world’s most hawkish monetary authority.  

 Bolsonaro’s approval ratings have sunk to new lows, says the Financial Times. A bungled pandemic response has left 600,000 Brazilians dead. He faces a growing thicket of legal investigations, but it is economic mismanagement that may prove “the most potent threat” to his re-election prospects. Never mind the recovery – in Brazil an outright economic contraction may be on the cards next year. “The 2022 elections cannot come quickly enough.”