Brazil’s Bovespa index has gone off the boil. It now hovers around the 70,000 level at which it started 2010. Why?
Uncertainty over forthcoming interest-rate hikes is one problem. The economy is expected to expand by up to 6% in 2010 amid strong domestic demand. Retail sales are now expanding at an annual rate of more than 10%.
Price pressures are also building, with inflation reaching a higher-than-expected 4.8% in February. Investors were therefore surprised that the central bank kept rates on hold last month. They will “wonder whether [the central bank] is behind the curve”, say economists at Itau Unibanco Holding. Citigroup is pencilling in a base rate of 11.75% by the end of the year, up from the current record low of 8.75%.
Higher rates will temper growth and make stocks “relatively unattractive” compared to bond yields, says Lex in the FT. A bigger worry is that “the commodity party may be winding down” – the energy and materials sector comprise 43% of the index. Commodities look due for a slide. China is tightening while, as Capital Economics points out, a fragile recovery in much of the developed world has been sparked by government stimuli that are set to be removed.
Once the boost from the inventory cycle has faded, growth is likely to disappoint. Capital Economics reckons slowing Brazilian growth and a setback in commodities markets imply a 7% slide in the Bovespa index by the end of the year.
But the long-term outlook remains good, says Nick Hasell in The Times. The days of hyperinflation are over. Meanwhile, the recent discovery of offshore oil should make Brazil the fifth-largest oil territory; $50bn is set to be spent on infrastructure. And consumer debt is still very low – mortgage debt is 2% of GDP. That bodes well for the financial services sector.
Long-term investors keen to avoid the commodity-heavy main index should consider buying into the flotation of the JP Morgan Brazil Investment Trust. It will focus on the kind of high-growth small and mid caps that are hard to find on stockmarket indices, says Hasell. Those who take part will receive one bonus share for every five they buy. The offer closes on 9 April.