Brazil is shining in the shadows of the Olympics - August 07, 2016
During the Olympics, the multifaceted Brazil gets more and more attention and many agree that the event can put the country in an even worse financial situation than it is in now.
Brazil assets started to recover this year and the stock market is among the best-performing markets in 2016 in dollar terms. Besides, the Brazil real advanced 20% against the US dollar, which also proves Brazil is among the leaders this year. All these factors fit perfectly in Innovative Securities’ analysis posted in February, which projected a significant upside potential of the Brazil’s stocks and assets despite the general markets’ predictions.
This outstanding stock market performance is a result of several things, such as the compelling turnaround on the commodity market during Q1 which has healed the export-oriented economy. We cannot ignore the political changes either. Michel Termer may reduce the immense budget deficit and rebuild trust that the former president has lost.
The new economic plan may be conducive to get back the investment grade of the country as well as pull Brazil out of its worst recession. For this, fundamentals should perform better, while Brazil still has the highest interest rate at 14.25% with inflation around 8-9%. Changing these requires deep structural reforms and the reform of the taxation system.
Although since our analysis in February the iShares MSCI Brazil Capped ETF (EWZ) rose near 60%, there may be insecurities as well. Since 2012 the lowest outflow was measured from the emerging market equity funds, while the developed ones faced the biggest since 2011 due to the higher uncertainty. Braver investors can still find excellent targets in Brazil, but let’s keep in mind the always reappearing political risks and the effects of the sudden turnaround of the oil price rise seen in the last two months. The debt crisis is still on the agenda.
Furthermore, it is not quite clear either, how Brazil will overcome the huge social discontentment and contrast after the Games. Any shock can send the Brazil real back to ground as well as the value of the Brazil stocks.
An edited version of this post appeared on: