Elections in Brazil used to keep markets on edge. But this time round, investors have largely ignored the presidential election. That’s because these days Brazil is deemed the “poster child” for emerging markets, as Sebastian Luparia of JP Morgan’s Brazil investment trust puts it. The last president, Lula da Silva, continued his predecessor’s market reforms, squeezing out inflation and paying down debt. His successor will be determined in a run-off on 31 October, but both remain committed to orthodox economic policies, so political risk looks minimal.
Brazil is booming
The reforms helped ensure “an extraordinary transformation” of Latin America’s biggest economy, says Fidelity’s Tom Stevenson in The Sunday Telegraph. Once written off as a hyperinflationary basket case, Brazil has grown by an average of 4% over the last eight years and should manage 7% this year. It achieved investment-grade status last year.
The number of people in poverty has fallen by 50% and around 32 million people, a sixth of the population, are estimated to have joined the middle classes. Favourable demographics, with 66% of the population between 15 and 64, and Brazil’s wide range of commodities, also bode well long-term.
As for the shorter-term outlook, the key influences on the Brazilian market are the energy and raw materials sectors, rather than industries geared towards the domestic economy, says Wirtschaftswoche. So the global growth picture, and especially the commodities outlook, is crucial. And with the global recovery weakening, it looks as though the Bovespa index will struggle over the next few months.
A boost from QE?
But while its fundamentals are not especially encouraging, Brazil, and indeed all emerging markets, could be set for a boost. That’s because a new dose of quantitative easing (QE) would increase global liquidity. Both the US and Britain are expected to print more money, and this week the Bank of Japan also said it intends to ease its monetary policy further. “Past experience strongly suggests that the emerging world will be unable to declare monetary independence from the liquidity injection likely in the developed world,” says Gavyn Davies of Fulcrum Asset Management. Liquidity trickles into promising assets, and emerging markets are more promising than most.
There has already been a rush into emerging markets. Low rates in the West have spurred a search for yield, says Buttonwood in The Economist. What’s more, economic power has now apparently made “a decisive shift” away from the developed world. Post-crisis Western economies have higher public debts than fast-growing emerging markets. So buying a stake in emerging markets looks like a “no-brainer”. Emerging-market equity and bond funds are already set for record inflows this year, says Richard Milne in the FT. The latter have already received $40bn; equity funds $50bn.
Some analysts are now worried. Timothy Ash of Royal Bank of Scotland notes that the first dose of QE helped ensure that
emerging markets soared in 2009, and now “the festivities” will continue. “A new bubble is being inflated” in emerging markets, with debt looking particularly overpriced now that spreads are back at pre-Lehman levels. Equity markets look more reasonable for now, but this may not last long. Fundamentals in all markets are taking a back seat, says Olivier Jakob at Petromatrix. They are trading “purely on liquidity expectations”. So if QE arrives, says Davies, it could prove “extremely positive for many emerging equity markets”. Until, of course, the bubble bursts.