We believe Brazil offers a salient example of how political change can accelerate a turnaround in an economy and stock market. Brazil currently has an interim government, pending the Senate’s impeachment of former President Dilma Rousseff (seen as likely to occur this month), and the political transition has brought renewed confidence and an agenda of reforms not only within its government but also within Brazil’s regulatory environment, aimed at attracting more private investment. We are seeing a lot of interesting privatizations, concessions and a new pro-markets agenda that are basically opening up the country. Amid the optimism for change, Brazil’s currency, the real, has risen to its highest level in a year, and Brazilian stocks have surged more than 30% year-to-date.1
There is certainly a risk that Brazil’s political challenges could be prolonged, but the last few months have shown us that there appears to be tremendous support in Brazil’s Congress and among its population in general for a new kind of agenda, one that not only modernizes the state but also modernizes the economy.
Looking at the dour gross domestic product (GDP) figures in 2015–2016, we can see Brazil has been in a sharp recession. The International Monetary Fund forecasts a contraction in GDP in 2016 (-3.3%), but then expects GDP growth to return to positive territory in 2017.2 We are expecting a likely bottoming out of the economy and have seen some rays of hope in leading economic indicators recently. In June, industrial production increased for the fourth consecutive month and consumer confidence rose to its highest level in a year. Hopefully, the goodwill generated by the Olympics this month will continue to recharge people’s spirits.
When we look at the government picture, there has been quite a sharp fiscal imbalance in Brazil. The new government’s first steps included putting a cap on expenditures of the consolidated debt, as well as tackling structural reforms in labor, pensions and in other areas needed to modernize the country. There is also talk of further releasing the state’s grip on the oil sector as well as other industries and sectors. The appointment of a very experienced team in key positions adds a lot of credibility to Brazil’s transitional government, not only in terms of a strong economic team but also the heads of state-controlled companies. This is creating tremendous optimism, and since Brazil’s equity market is coming from such a low base over the last five or so difficult years, we think any improvement in the economy could have a tremendous impact on Brazilian companies and the business environment in general.
Earlier this spring, Mark and members of our team joined me in Brazil and shared their views on some potential investment opportunities. Here are a couple of links to prior blogs below we think are worth revisiting.
Challenges and Opportunities Facing Brazilian Companies
Mark Mobius shares his observations on a few of the many companies he and the team visited recently in Brazil, the challenges they are facing, and the ways they are working to overcome them. It is our job to pick and choose the companies we believe can survive and prosper when the situation turns brighter in Brazil, which we think it will in time. Read more
Has Brazil Bottomed?
People find it difficult to believe the situation will turn around in a downtrodden market like Brazil, but we have found that, in general, the time of maximum pessimism marks the time when a bottom is near, and that’s the time we want to be investing. Read more
The comments, opinions and analyses presented herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
Important Legal Information
All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
1. Source: Bloomberg LP, as of August 4, 2016. As measured by the Ibovespa Brasil Sao Paulo Stock Exchange Index. Indexes are unmanaged, and one cannot directly invest in them. They do not reflect fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance.