Brazil’s stockmarket jumped by 40% in 2016; this year, it has already gained 10%. The economy is gradually rebounding from a deep recession, while the impeachment of the former president, Dilma Rousseff, cleared the way for a business-friendly administration led by Michael Temer.
All very well, Albert Ramos of Goldman Sachs told the Financial Times, but the market seems to be pricing in a V-shaped recovery that won’t happen. “All sectors are overstretched and need to de-lever.” The International Monetary Fund is pencilling in growth of just 0.5% in 2017.
But that may be a bit pessimistic, according to Capital Economics. Investment has dropped so far amid the political crisis and fall in commodity prices that it can hardly decline any more. That removes a big drag on output. The outlook for exports is brighter now that commodities have recovered. Meanwhile, interest rates have been coming down from a ten-year high since October, as the central bank has brought inflation under control.
Looser monetary policy is generally good news for stocks, and Brazil is no exception. In every past easing cycle there has been an equity rally of at least 20%, according to Luis Oganes of JPMorgan. The prospect of liquidity entering the economy and market is making up for relatively lacklustre GDP growth. Brazil is also one of the few emerging markets that would be shielded from Trump-induced turbulence in the global economy thanks to its large domestic market, says Goldman Sachs.
The government’s gradual progress with structural reforms, notably a public spending cap designed to last 20 years, has also encouraged investors. Brazil remains one of the world’s cheapest stockmarkets, trading on a cyclically adjusted p/e of ten. In short, it does not seem too late to join the party.