Brazilian stocks have under-performed in the last few years, but in our opinion there is a solid investment thesis for taking a serious look at this emerging market in 2015.
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The country is in the grip of an economic crisis and major corruption scandal.
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However, that could be an opportunity for investors, according to our research for the LookFar Risk Managed Alpha Investment Portfolio.
There are a lot of similarities between today and Brazil from an economic and political standpoint in 2002.
This is a good sign given the fact that during 2003-2004 investors saw a 250% market rally from a bleak 2002 starting point.
In 2002 Brazil was facing an economic crisis and was headed toward a national election with huge debt and a rapidly falling currency.
Back then, Lula da Silva, with the support of the nation’s central bank took measures to control inflation and imposed market-friendly policies and structural reforms.
The Brazil IBOVESPA Index (in US dollars) rose 1,705% from Sept 2002 through June 2008. That compares to just a 57% increase in the S&P 500 Index over the same period of time.
We expect Dilma Rousseff, a long time colleague of Lula, to take similar measures.
Fortunately the situation today is not as bad as 2002 because there is no fear of a default.
Brazil’s debt situation was far worse 13 years ago. Foreign reserves were much lower (8% of GDP in 2003 vs. 22% today). Inflation expectations were higher and there was a lot of pressure on the currency.
In our opinion, there is no reason to expect the central bank to be less aggressive today.
We believe that our bullish stance on Brazil is appropriate especially since its fiscal position, relative to 2002, is better.
Credit rating agency Standard & Poor’s recently reviewed its credit rating of Brazil.
It lowered its rating, but still considers the country investment grade citing the steps they’ve taken to improve their fiscal position.
Finally, Brazil will benefit from a stronger dollar.
The US is Brazil’s second most important trading partner and the stronger dollar results in cheaper Brazilian goods (in US dollars terms).
China’s growth, its largest trading partner, also continues. This will all help Brazil and investors will regain their confidence.
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