While investors have fled from equities worldwide, they have “run screaming” from Brazilian stocks, says Samantha Pearson on FT.com. Brazil’s Bovespa index is the worst-performing index in the Americas this year, down by almost 30% to a two-year low. Even before the latest global rout, stocks were “in a pretty sorry state” due to a “toxic combination” of problems.
A key difficulty is persistent inflation. The central bank has raised interest rates five times this year, to 12.5%. Yet in July inflation reached 6.87%, a six-year high. Rates are thus set to stay higher for longer than investors had been expecting. That tempers the growth outlook and also makes bonds look far more appealing than equities. Fixed-income markets have “siphoned investors from riskier equities”, says Luciana Lopez on Reuters.com.
Brazil now has the highest inflation-adjusted interest rate among major economies. This has propelled the currency, the real, to historic highs, undermining exports. Overall industrial production is now barely growing on an annual basis. The consumer credit and spending boom that’s been a key growth driver looks unsustainable now that rates are rising and lending is being restricted.
“All the signs suggest that Brazilian consumers are overstretched,” says Neal Shearing of Capital Economics. With interest rates on loans being high, simply servicing a loan consumes around 18% of disposable income, he reckons. With bad loans on the rise, growth could slow sharply in the next few years.
Government meddling in the management of index heavyweight Vale has also put investors off. The same goes for the “arbitrary nature” of the measures Brazil has introduced to limit the rise of the real. Infighting among members of the new administration led by President Rousseff has thwarted major tax and labour reforms that would raise Brazil’s potential growth rate. Many had hoped for an “ambitious economic agenda” to bolster competitiveness, says Zeina Latif of Royal Bank of Scotland.
No wonder the commodity-heavy Bovespa was especially vulnerable to the latest jitters over the darkening global growth outlook. Brazil, says Pearson, looks “less like a top getaway for investors and rather, once again, like the backpacker’s choice: cheap, adventurous and full of risks”.