Brazilian stocks, which we first deemed promising over two years ago, have been on a tear: the Bovespa Index has risen 122% since 2003. Investors have been cheered by the improving economy. Strong global demand for raw materials is fuelling a trade surplus, while the left-wing government’s pro-market policies have kept spending and inflation under control (inflation is down to 4.5% and interest rates have almost halved to 14.25% since 2003). Meanwhile, consumption is rising rapidly as the middle classes expand.
Brazil’s president Lula da Silva has just been re-elected and has promised that responsible fiscal policy and inflation targeting will continue. The key challenge now is to boost growth from its current pace of 3%, as Jonathan Wheatley notes in the FT. The government must create a sustainable basis for growth by stimulating investment, which will require reform of both the labour market and the bankrupt pensions system. Given the stable economy, further impending rate cuts and a market p/e of just ten, it’s no wonder plenty of fund managers have been banging the drum for Brazil in the press this week. But while the market still looks appealing in the
long term, a US slowdown could well cause short-term turbulence.
The economy is relatively closed, and rising real incomes suggest that domestic demand could take up the slack from falling exports as global growth slows, says Merrill Lynch. However, the recent market wobble following lacklustre US growth figures suggests that Brazilian stocks have yet to shake off Wall Street’s influence. One way in is through a London-listed ETF tracking the MSCI Brazil index (IBZL), though a safer way for now may be via a general emerging market fund. For instance, Brazil takes the largest regional weighting in the Templeton Emerging Markets Investment Trust, and its top ten holdings include Brazilian consumption and commodities plays Unibanco and Petrobras.